Although small business owners wear many hats, too often, the one labeled “Retirement Planner” is not among them. Hats may add panache, but basically, they’re for protection. Today, protecting your financial future, as well as that of your employees, by establishing a defined contribution plan is relatively easy.
The most popular defined contribution plans have fixed contributions and variable benefits — variable because, in many cases, the participants, not the employer/plan sponsor, take responsibility for determining how their contributions are deposited according to their own objectives and time horizons.
If you think that by virtue of being a small business owner you are unable to offer your employees a retirement plan, think again. Consider the SIMPLE IRA (Savings Incentive Match Plans for Employees Individual Retirement Account), developed by the government to provide an affordable retirement plan with less administrative expenses to the employer. Couple this with the financial industry’s recent offering of web-based retirement plans, and this option may be more affordable than you thought. More to the point, such a move may provide business advantages in addition to working toward future financial security for yourself, your family, and your employees.
People, Morale, Taxes
Employers have three obvious reasons to include a retirement plan in their benefits package. First, attracting and retaining quality employees will be easier if you provide 1) a plan that allows for tax deferrals on current income and 2) the means to build a retirement nest egg through the power of compounding, in which savings grow over time as any earnings are added to principal.
Second, just as you and your family will feel more comfortable with a retirement plan in place, your employees’ morale is likely to benefit from tangible proof that you care about their futures. Offering your staff a retirement plan, especially one in which you match some, or all, of their contributions, is likely to strengthen their commitment to your company.
Third, retirement plans provide several, clear tax advantages: 1) you can deduct the contributions you make to your employees’ accounts; 2) you and your employees can save on current taxes because contributions are tax deferred; and 3) it’s likely that taxes on accumulated income and possible growth for both you and your employees will be lower at retirement. Federal income taxes are due upon withdrawal, and a federal income tax penalty may be applied to withdrawals prior to age 59½.
Not Your Parents’ Pension
According to The 2000 Small Employer Retirement Survey (SERS)*, administrative costs and burdens are one of the major reasons small employers cite for not offering their employees a retirement plan. Although you and your accountant must determine if your business has sufficient revenue flow to offer this employee benefit, you should know how easy many of today’s defined contribution plans are to administer.
Unlike defined benefit plans — in which employers are required to make the contributions and assume responsibility for managing the funds to guarantee that employees receive a fixed, pre-established payout at retirement — defined contribution plans have been designed to minimize employers’ involvement.
The plan provider, often a bank or financial institution, handles most of the paperwork, deposits the contributions as directed by the participants, and then services the participants. Education/communication materials and programs are usually included. In fact, some defined contribution plans are now being administered over the Internet, further reducing recordkeeping costs.
The Right Plan for You
Keep in mind there are at least half a dozen plan choices in addition to SIMPLE IRAs — including 401(k)s, SEP (Simplified Employee Pension) IRAs, payroll deduction IRAs, profit-sharing plans, and money purchase plans — whose provisions differ significantly. You will want to compare and contrast them, keeping in mind such issues as the desired level of contribution by employer and employee, vesting rights of employees to receive employer-contributed benefits, and features such as loans and hardship withdrawals, as well as taxes and penalties for early withdrawals.
If, like many Americans, you are concerned about the future of Social Security, setting up a retirement plan takes on more urgency. Being informed on all available options will help you make the most appropriate choice for yourself and your employees.
*The 2000 SERS is sponsored by a number of private organizations, most notably the Employee Benefit Research Institute (EBRI).