Retirement Plans and Your Small Business
News flash: most small business owners are not saving enough for retirement. A 2010 survey by the Small Business Administration found that only 36% have an IRA and less than 20% participate in a 401(k) plan. And if these statistics are accurate, there must be a huge number of small-company employees that also do not have access to a company retirement plan. Now I’m sure there are a number of reasons for this, but I would bet the single largest factor is the perceived complexity and cost of setting up a retirement plan. The fact is that there are many retirement plans for small businesses to choose from, with varying degrees of complexity and a range of costs. But they all have several significant benefits in common.
Why Start a Retirement Plan?
There are many reasons to implement a retirement plan for your company, starting with your own retirement needs. With all of the other issues that business owners face each day, retirement planning often is pushed to the back burner. But most owners don’t want to work into old age, and even if they do, their health or their spouse might have other ideas. Retirement income needs vary depending on lifestyle and goals, but you should estimate that you will need 70% – 90% of your preretirement income once you stop working.
Even if you are setting money aside today, you may be missing out on some significant tax advantages if you do not have a company plan. A properly structured retirement plan has several tax benefits, including the following:
- contributions the employer makes to the plan, whether for your account or for your employees’ accounts, are deductible from your income
- contributions made by an employee, in most cases, are not taxed until they are distributed to the employee in retirement
- taxes on interest, dividends and capital gains are deferred until savings are withdrawn in retirement
- tax credits may be available to offset the costs of starting a plan, depending on company size and the type of plan implemented
In addition to these potential tax benefits, company retirement plans can also help with attraction and retention of high-quality employees. Those companies that do not offer employees an opportunity to save for retirement, in a tax-deferred program, with potential matching or profit-sharing contributions from the employer, are going to be at a competitive disadvantage when it comes to attracting talent.
What Are The Options?
As I mentioned, there are a number of plan options available, which can be daunting, but also can provide the flexibility to suit your specific needs and goals. Plans fall into three basic categories:
- IRA-Based Plans which, as the name implies, incorporate the features of an Individual Retirement Arrangement. Although these are most often associated with individual savings plans, employers can also help their employees set these up and fund them on a regular basis. The most common are the Payroll Deduction IRA, the Simplified Employee Pension (SEP) IRA and the SIMPLE IRA Plan. These plans are relatively easy to set up and maintain, with lower costs than many other retirement plan options. They tend to be used by smaller employers and, in the case of the SIMPLE IRA, they are limited to employers with 100 or fewer employees.
- Defined Contribution (DC) Plans are employer plans that offer retirement savings, but do not promise a specified amount of benefit at retirement. Common forms of the DC plan are the Traditional 401(k) and the Roth 401(k), as well as 403(b) or 457 plans for government and not-for profit employers. Most company profit sharing plans are also DC plans. Like the IRA-based plans, the benefit at retirement is based on contributions to the plan and earnings on the invested amounts. In most cases, contributions come from both employee and employer, with employer contributions based on a matching formula or discretionary funding. DC plans tend to be more complex than the IRA plans, and therefore more costly and burdensome to maintain. But for larger employers, the benefits for employees can more than offset the added complexity.
- Defined Benefit (DB) Plans are plans that offer a fixed, pre-established benefit for employees, often referred to as a pension. Today, these plans are seen much more in the public sector and at larger, well-established companies. They typically are funded entirely by employer contributions, which are based on the terms of the plan and actuarial calculations. Because DB plans promise a specified return to participants regardless of actual market results, the employer bears much more investment and market risk than with the other types of plans. For this reason, and due to higher costs and administrative burdens, DB plans are seldom implemented by smaller employers.
How Can I Get Started?
Starting a company retirement plan is easier than you might think. There are many resources available online, but one of the best is the U.S. Department of Labor website at www.dol.gov/ebsa. If you want someone to help you through the issues and implementation, talk to your financial advisor, CPA firm or payroll processing company. Chances are they have experience in this area and, if they don’t, they’ll know who to contact.
Sound retirement planning is important for everyone, including (and perhaps especially) the small business owner. With a company retirement plan, you can not only save for your own future, but you can help your employees do the same, all while realizing significant tax advantages for them and for your company. And chances are the setup process, costs, and ongoing administration will be less burdensome than you think. With the choices available, you’re bound to find a plan that’s right for you.