A Primer for Offering Retirement Benefits
Small businesses are not just in competition for customers. It's a fight to attract and keep employees, too.
"Cost is even more of a problem with the scheduled increases in taxes and health care about to hit small business in 2011," says Rick Kahler, a certified financial planner with Kahler Financial Group in Rapid City, S.D. "Employers will be under pressure to cut costs, and retirement plans will be on the short list of potential places to save money."
While eliminating a retirement plan or simply not offering one may seem like a smart move, having a plan will help your business save money (in the form of tax deductions for your contribution) and headaches (by retaining valuable workers).
What Type of Plan Should You Offer?
When many people hear "retirement plan," they jump straight to the 401(k). If you have a large company with more than 50 employees, a 401(k) could be the best option. But that's what it is: an option. Small companies and sole proprietors should look beyond 401(k)s because the cost could be prohibitive. Many companies might be better off with a different kind of plan.
Before looking at specific plan types, think about what you want to accomplish. Of course you want to offer retirement savings opportunities for employees and for yourself, too, but there are other considerations:
- How much money do you personally want to save every year? You can give your business a tax deduction and lower your own taxable income with some plans. And with any plan, you'll be taking steps to secure your retirement.
- Do you want the flexibility to contribute different amounts based on annual cash flow? Some plans require the same contributions each year, while others allow you to determine contribution amounts based on your cash flow and the health of the business for the year.
- Do you want to match funds for your employees? "A match is free money for the employee and an immediate return to the employee," says Ronald Garutti, a certified financial planner with Newroads Financial Group in Clinton, N.J. "Today, many companies are reducing or cutting match plans. Any company with an aggressive match should result in happier employees, and it should be a sign of the employer rewarding the employee."
Your answers to those questions will narrow down the kind of plan you should investigate.
Next, learn about the different offerings:
- Solo 401(k): If you and your spouse are the only employees, this plan will allow you to save more than others. That's because you make two types of contributions: as the employer and as the employee. As the employee, you can set aside up to $16,500 in 2010. As the employer, you can add a profit-sharing contribution of up to 25 percent of compensation, for a maximum of $49,000. If you're over age 50, you can add an extra $5,500 to the pot for your "catch up" contribution.
- SEP-IRA: If you have a few employees, a SEP-IRA could fit the bill. It offers great flexibility in contributions. Employers make the only contributions, with a maximum of 25 percent of salary and up to $49,000 for 2010. But if business is slow, you don't have to make contributions, or you can make smaller ones--as long as you contribute the same amount for each employee.
- SIMPLE IRA: These may be appropriate for businesses with 100 or fewer employees. Matching rules are more complicated for the SIMPLE IRA, and the matches are required, but they're flexible. You can choose either to match the contributions of the employees who participate in the plan, or you can contribute a fixed percentage of all eligible employees' pay. "You can cut back SIMPLE-IRA employer match below 3 percent to a minimum of 1 percent, as long as you do it in two or fewer years out of five years," says Kahler. "The employer can also switch from a match to a 2 percent nonelective contribution at any time." Employees can save up $11,500 for 2010 (and there's a "catch up" contribution allowed for those over age 50).
- Profit-Sharing Plans: Employers make contributions--employees don't--and contributions are flexible and don't have to be made every year as long as they are "recurring and substantial." When you do make contributions, your company will have a predetermined formula for how contributions will be calculated, with a maximum of 25 percent of compensation, or $49,000 in 2010.Defined-Benefit Plans: This is a type of pension plan. The employer sets aside funds that will eventually pay for a specific monthly benefit when the employee retires. The amount saved--and eventually received as a pension--is determined by a formula that accounts for an employee's salary history, years of service and age.
Finding the Right Plan Administrator
You may be a do-it-yourselfer in many areas, but setting up a retirement plan for your company should be handled by a pro. Interview several advisors so you can compare advice and costs, and make sure your business isn't being treated in a one-size-fits-all fashion.
"Advice and assistance are critical to instituting the best plan, as every employer is unique and a plan should be tailored to the owner and the employees," Garutti says.
There are lots of potential commissions to be made by managers of retirement plans. Instead of finding someone who works on commission, seek out someone who bills themselves as a fee-only advisor or fee-only third-party administrator.
Kahler says a commissioned broker managing your plan will mean your plan will be limited to only the mutual fund investments offered by that one company.
"Not only will the hidden costs be much higher, but no fund company can offer great managers in every asset class," he says. "An independent team of advisors will work together to select fund managers that are the best in an array of asset classes."
Be sure you offer five or more asset classes (different areas of the stock and bond markets) for your employees to choose from. Go beyond stocks and bonds, and give diverse options such as REITs, commodities and other asset classes.
Ask your advisor about the costs before you make a final decision.
The costs to manage retirement plans vary by plan type and by administrator, so make sure you understand what you're getting into. You'll be responsible for the cost of potential matching contributions, plus fees to establish the plan and to properly notify the IRS of the set-up.
Go in smart. Starting a plan only to give up on it a few years later isn't an option. Your employees--and your own retirement--will be counting on the benefits.
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