Five Retirement Plan Options for Your Business
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Owners of small and midsize businesses don't save enough for retirement. A March 2010 report released by the SBA found that only 36 percent have an IRA, and only one-third of those contributed to it. Less than 20 percent participate in 401(k) plans.
Finding the right plan can be confusing, "especially if the business changes or grows," says David Boucher, senior vice president of corporate benefit services at Longfellow Benefits, an insurance brokerage and consulting firm in Boston. But something is better than nothing. Use our chart below to get familiar with the options.
Suggested for: Businesses with no employees
Contribution thresholds: Up to 25 percent of up to $245,000 or $49,000 for 2010 and 2011
Of note: Easy to set up through most major financial institutions or benefits consultants. Low administration fees.
Suggested for: Businesses with fewer than 100 employees
Contribution thresholds: Employee contributions may not exceed $11,500 for 2010 and 2011; combined employer and employee contributions may not exceed $16,500
Of note: Easy to set up and maintain. No testing or compliance issues. Not permitted for businesses with more than 100 employees.
Suggested for: Businesses with more than 25 employees (varies, depending on fees)
Contribution thresholds: Contribution limit is $16,500 for 2010 and 2011 and subject to cost-of-living increases dictated by the IRS after 2011
Of note: Administration fees can be steep--up to several thousand dollars, depending on the number of employees. But, participants can borrow against their contributions, making this an attractive investment option.
Cash balance plans
Suggested for: Professional services firms and other businesses with employees with high discretionary income
Contribution thresholds: Defined by plan and market rates
Of note: This type of defined benefits plan allows a participant's account to be credited each year with a pay credit, such as 5 percent of compensation, and an interest credit, which is typically a fixed rate or a variable rate linked to an index. The ultimate payout is not affected by market rates, but adheres to the benefits put forth when entering the plan. Administration fees may be several thousand dollars.
Suggested for: Businesses with employees and profits
Contribution thresholds: The lesser of 25 percent of compensation or $49,000 in 2010 and 2011, with cost-of-living adjustments in later years
Of note: This type of plan is funded by employer contributions only and those contributions are completely discretionary. Annual filing of IRS form 5500 is required. Profit-sharing plans can be used in conjunction with other types of retirement plans.