Have you avoided retirement plans because of the large fees and time-consuming administration? If so, I’m happy to tell you that things have changed. There are more options than ever, including a plan that has no fees or recordkeeping requirements for employers. In fact, the DOL warns that in the near future, you may no longer have a choice. Individual states are being encouraged to create retirement programs, and the plans include mandates for employers.
The focus on retirement plans might be because Social Security and small savings accounts do not provide adequate income. Retirees also need a pension or retirement plan in order to cover their expenses, yet 75% of workers do not have retirement savings plans.
Overview of retirement plans
IRA (Individual Retirement Account)
An IRA is an investment with tax-free benefits and can be set up in a variety of accounts (e.g., CD, mutual fund). The earnings deposited in a traditional IRA are tax free; deposits to a Roth IRA are made with earnings that have already been taxed. The withdrawals of principal or interest from a traditional IRA are taxed. Withdrawals of principal or interest from a Roth IRA are not taxed.
SIMPLE IRA Plans (Savings Incentive Match Plan for Employees)
The SIMPLE IRA gives small businesses an easy way to offer their employees a retirement savings plan. You complete an IRS form, and setup can be free, depending on the institution you select.
Any advisor fees are charged to the employee, and larger contribution amounts are allowed on this type of IRA. However, there are large penalties for early withdrawal, and employers are required to pay a matching contribution (1-3%). Employer costs are tax deductible.
SEPs (Simplified Employee Pension)
The SEPs (Simplified Employee Pension) is another easy-to-set-up retirement plan through the IRS. However, it can be costly if you have more than a couple employees. With SEPs, the employer makes all the contributions, and they are tax deductions.
So, if your business is doing well, you can share the profits with your employees by adding to the SEPs account (which can be good motivation). It also is easy to dissolve when an employee leaves.
Solo (individual) 401(k)
The Solo 401(k) works best for a self-employed individual or very small business. There are some benefits if you want to make larger contributions, but there are penalties and requirements that can be challenging if you have a bad year. Also, there will be expenses for setup and administration; however, they are lower than the types of 401(k) plans set up for a larger workforce.
Defined benefit plans
Defined benefit plans are less common these days, but can be a good option for the self-employed or a small business with a lot of money to contribute each year. It can be combined with other plans for even greater contributions. Costs can be high, but so are the tax deductions.
Defined benefit plans are less common these days, but can be a good option for the self-employed or a small business with a lot of money to contribute each year. It can be combined with other plans for even greater contributions. Costs can be high, but so are the tax deductions.
When it comes to payout, there are restrictions. For example, you must offer the plan for all employees, so when someone leaves you lose part of your capital. For this reason, it is usually a sole proprietor who selects this retirement option.
Multiple Employer Plans (MEP)
Intended for small businesses, a MEP allows multiple small businesses to band together and offer a retirement plan to employees. This partnering enables the business owners to share the prohibitive costs and tedious administration of a retirement plan–making it affordable. It also helps the employer who is not knowledgeable about retirement plan options. Currently, MEPs are only allowed for trade associations and their members.
Robo-advisors
A robo-advisor is the new kid on the block, for the most part, and made possible by the internet. By using both automation and advanced algorithms, robos can offer consumers professional portfolio management at a fraction of the usual cost. The Wall Street Journal (July 2016) reports that robos are getting into the 401(k) business. As states are beginning to require small businesses to offer their workers retirement plans, entrepreneurs saw an unfilled need. Figuring out how to set up a 401(k) plan for small business can be difficult, so they are offering easy-to-open 401(k) plans with low expenses for the employer.
Less common retirement plans
With all the different types of investments and retirement accounts to choose from, this list could get very long and detailed. And there are new retirement options cropping up all the time. In addition to the plans listed above, the IRS website also provides information about: 403(b) tax-sheltered annuity plans, Designated Roth accounts, and SARSEPs.
The IRS publication Choosing a Retirement Solution for Your Small Business contains a table that compares the features of common retirement options.
Other retirement considerations
Retirement options could improve employee retention
As a small business owner, your employee benefit package may not compete with those of larger businesses. Forbes (2013) reports that most large companies have retirement plans, but only 14% of small businesses with 10 or fewer employees, and 5% with up to 4 employees, offer any retirement options.
If you can offer a retirement plan to your employees, it could demonstrate that you care about their future, and encourage them to stay with you (turnover is expensive!). At a minimum, you could just share current information about retirement plans, the power of compound interest when you start saving in your 20s, etc.
Questions to ask yourself about offering retirement plans
When you look at retirement plans, you will want to consider a number of factors:
- What are the contribution limits and deadlines?
- Are contributions pre-tax or post-tax deductions from payroll?
- What kind of tax break can your employees expect to get?
- What fees or recordkeeping may be required for you as the employer?
- What plans or mandates does your state currently have for employee retirement plans? (California, Illinois, Connecticut, and Oregon were the first to put plans in place.)
- What happens to an employee’s retirement plan savings if he quits and moves on to a new employer?
- What are the penalties if an employee withdraws their money and terminates their retirement plan? Can employees borrow funds from their retirement account?
- Do you think you could offer a small percent of matching funds to your employees’ contributions?
Retirement plan mandates
Some states have issued mandates already which require small businesses to establish retirement plans, and the state may have set up a retirement plan the employer can use. Nationally, the Social Security Administration has proposed its own mandate.
According to the Social Security Administration, the proposed mandate requires two-year-old businesses (and older) with a minimum of 10 employees to automatically offer employees an IRA option, supported via payroll deductions. However, if you already have a retirement plan in place, the policy says you may be exempt.
Employee education about planning for retirement
Even your youngest, part-time, and seasonal workers need to understand the importance of planning for retirement. In fact, one of the employer mandates of the impending state programs is to educate your employees. Fortunately, there are plenty of online resources.
Resources for retirement options
You can check with your accountant or financial planner when looking for retirement options. If you prefer, you can always find up-to-date information for both you and your employees on several government websites.
DOL
Consumer Information on Retirement Plans
Pension Protection Act
Choosing a Retirement Solution for Your Small Business
IRS
Help with Choosing a Retirement Plan
Retirement Plans Frequently Asked Questions (FAQs)
Small Business Retirement Plan Resources
SSA
Retirement Planner: Plan For Your Retirement
Payroll deductions for employee retirement plans can be set up in your payroll software for easy computation and accurate reporting. Try Patriot’s online full-service payroll for free! Our payroll services will file and remit payroll taxes so you can focus on your business!
This article was updated from its original publication date of 8/3/2016.
This is not intended as legal advice; for more information, please click here.
