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As financial institutions and lawmakers have realized the changing needs among America's work force, employers can select from more retirement plans than ever before, which presents the challenge of picking the best plan. A plan that adequately serves few of the employee population hardly provides a real benefit to anyone; however, the plan still must be reasonably priced and easy or affordable to administer.
Like choosing any other benefit, you must consider not only the cost but also the return on the investment you're making.
"If an employer has 25-year-old employees, they are not as concerned about retirement," said Steven Coon, CEO of Safemoney Advisors LLC in Anchorage. "If an employer has $3,000 to apply toward retirement, most younger employees would want a raise, not apply it toward retirement."
He also believes that employees starting families are more interested in their immediate need of good health care coverage than their retirement, which could be as many as 30 years away.
Retirement plans have become very portable, which nearly eliminates the loyalty factor.
Despite the devaluing of the retirement plan as a benefit, when compared to a raise or stellar health benefits, it's still worth your resources as an employer to find a retirement plan to attract experienced talent to your company. If you take a balanced approach in spending your benefit dollars and match the plan to your employees' needs, you're sure to find the right fit for your company and for your employees.
Non-qualified and qualified comprise the two basic categories of retirement plans. Non-qualified retirement plans don't comply with the requirements of the Internal Revenue Code and Employee Retirement Income Security Act of 1974 (ERISA). These kinds of plans tend to favor highly compensated employees and for that reason, they don't receive tax breaks like qualified retirement plans. With the exception of 457 Plans, the earnings on these plans are taxed and cannot be rolled over into an IRA. Non-qualified plans have become less desirable than their tax-deferred counterparts.
Qualified retirement plans comply with Internal Revenue Code and ERISA. Qualified plans provide tax benefits, such as allowing employers to deduct contributions the same year they were made and delaying the taxation of contributions and earnings until they are withdrawn. The earnings on the money held by the plan's trust aren't taxed to it, and employees can also transfer their funds into another plan, such as an IRA, to put off taxation even longer.
The three types of qualified retirement plans may be classified as defined benefit plans (traditional pension plans), defined contribution plans, and mixed plans that merge the best elements of both. Basically, a defined contribution plan specifies how much an employer puts into the pot without a guaranteed amount paid monthly upon retirement. A defined benefit plan focuses on what employees receive monthly upon retirement.
Compared to defined benefit plans, the defined contribution plan shifts "the cost and risk from the employer to the employee," Coon said. "An employer only has so much money to spend and they don't have the same resources they once did."
SELF-EMPLOYED/ NON-INCORPORATED
Keogh (HR-10) plans are qualified plans for the self-employed, partnerships and other owners of unincorporated businesses. They can be defined benefit or defined contribution plans and the contributions and earnings are tax-free until withdrawal. Like most retirement plans, Keough plans enact a 10 percent penalty for early withdrawals, which would be before age 59 1/2. The annual contribution limit is $40,000.
SMALL EMPLOYERS
For companies that employ 50 or fewer, chances are, there's no staff dedicated only to administrating employee benefits. Likely the owner does it or has someone else do it as a part of his or her many other job duties. A defined contribution plan with a safe harbor arrangement is both easy and affordable to administer.
"It eliminates the discrimination testing by making a matching or guaranteed contribution, 3 percent to 5 percent," said Cathie Straub, financial strategist with Financial Resources Inc. in Anchorage, "and the employer doesn't have to worry about the highly compensated and not highly compensated employees."
Ken Martinson, president of Financial Resources, agrees.
"We're seeing the use of safe harbor solving the problem of restricting owners and highly compensated employees contributing based upon less compensated employees," he said, "and employees are not subject to vesting, so it's greatly simplified for the employees and employers."
A simple Individual Retirement Arrangement, also called an Individual Retirement Account (IRA), also can provide an easy means of ensuring your employees' future retirement income. Similar to a 401k, but with different levels of contribution, this kind of plan does not require plan testing and any employee, including the owner, can contribute up to $10,000 per year. Employers are not required to contribute if employees don't contribute. The employer's maximum match is 3 percent of the employee's salary.
That factor especially appeals to small employers on tight budgets.
"A small employer can see what his maximum contribution will be: 3 percent of payroll," said John Lukehart, a financial advisor with New York Life in Anchorage. "He can tell what's going to happen and what he's obligated to do."
The Simplified Employer Pension (SEP) was an IRA set up by the employer. The SEP is popular among small employers, but with one caveat. If owners want to put in the maximum contribution for themselves, they have to contribute the same amount for employees, up to 15 percent or $30,000, whichever is less.
"A lot of SEPs have been switched over to simple IRAs," Lukehart said. "A lot of my clients want to set aside as much as possible for retirement but can't afford to put aside as much for employees."
As of Jan. 1, 1997, the SEP IRA was replaced by the Savings Incentive Match Plan for Employees (SIMPLE) for employers with 100 or fewer employees and no other pension or retirement plan. Structured like an IRA or 401(k) plan, the SIMPLE allows employees to contribute any percent up to $10,500 annually and mandates employers to match up to 3 percent of the employee's pay. Any two years out of five, the employer can decrease the maximum matching contribution. Or, the employer may choose a 2 percent salary contribution whether or not they contribute to the plan.
Withdrawals from a Roth IRA are not taxable if they're made after the employee is 59 1/2 years old or if under a few other qualifying conditions. Withdrawals on contributions, not earnings, may be made tax-free. And withdrawing for a few situations such as a first home or a child's education represent a couple of exceptions. Dipping into earnings will incur a 10 percent fee and the funds will be taxed. There's no requirement to cash out upon retirement. The maximum annual contribution is $4,000 for any single person making less than $99,000 and $156,000 for those filing married jointly.
MID-SIZED EMPLOYERS
Another defined contribution plan, the 401(k), also known as a cash or deferred arrangement (CODA) plan, allows employees to contribute toward their retirement pre-tax until withdrawal, and the option of additional, taxed contributions. The employer can establish a formula for matching employee contributions (such as matching half of the employee's contribution up to 6 percent) or base it upon the company's earnings as part of a profit-sharing plan. The maximum annual contribution is $15,500.
The new wave in 401(k) plans makes administering them a cinch. Instead of opting in to join the plan upon hire, employees are automatically enrolled and must opt out if they don't want the plans. Companies using this tactic "get much better participation that way," Lukehart said.
Many mid-sized companies are also offering tiered plans that permit employees to choose investment portfolios classified as conservative, aggressive and very aggressive.
"Someone who's 20 could go aggressive, but someone 45 might want moderately aggressive," Lukehart said.
Employees can make informed decisions because new legislation allows employers to "farm out the advice to a fiduciary," Lukehart said. "It costs something but the employer covers that cost."
The investment information counts as another benefit and many employers find that their participation rates increase because "the employer feels happier about what he's doing with his money," Lukehart said.
Adding profit-sharing to the 401(k) gives employees more motivation to work hard and to participate in the plans. It's all about offering choices to make retirement planning seem custom-made for each employee.
LARGE EMPLOYERS
Some larger companies still offer defined benefit plans, but many have converted to cash balance plans, which merges aspects of defined benefit plans and 401(k)s. Each participating employee has an account which he can cash upon retirement or, unlike defined benefit plans, roll it into his own IRA or other investments. Either way, once the cash comes out, it's taxed. The employer bears the risks because the employee's account grows only through the employer's contribution, usually a percentage of the employee's salary, and the earnings on the fund, the rate of which the employer must guarantee. Unlike defined benefit plans, the longevity of the employee makes no difference on earnings or contributions, making this plan advantageous to younger employees.
GOVERNMENT OR TAX-EXEMPT
The 457 Plans are non-qualified plans for government employees and those employed by tax-exempt organizations. The earnings and contributions are taxed only upon withdrawal. They may be rolled over to an IRA, 401(k), 403(b) or 457 plan. The maximum annual contribution is $15,500.
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