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What Retirement Plan Should You Offer Employees?

Author: Katie Truesdell Date: April 08, 2014

Four options for four different small business owners.

For small business owners looking to lure talent, retirement plans are becoming increasingly attractive bait.

That’s because Americans could be facing a retirement crisis. According to a 2013 report from the National Institute on Retirement Security, workers are $6.8 to $14 trillion short of what they need to live comfortably in retirement.   

To offer an overview of retirement plan options and what kind of small business owners should consider them, NFIB tapped Mel Piasek, the owner of Elite Pension Consultants, a third-party administrator of all tax-qualified pension plans, and Daniel Sentell, director of communications of Broad Financial, each in Monsey, N.Y.

Defined Benefit Plan

A defined benefit plan offers fixed benefits upon retirement—the resulting contributions are determined by factors such as salary history and length of employment. In a defined benefit plan, the employer assumes responsibility of a fixed rate of return as determined by the government. Therefore, this plan doesn’t offer flexibility in that an employer must contribute minimum funding on an annual basis and guarantees the pension benefit regardless of investment performance.

Who Should Offer It: This is one of the most attractive plans to employees because of the guaranteed benefits, and employers can contribute more than other plans, earning greater tax deductions. Small business owners with significant taxable income (to the point where a $52,000 deduction—the max under a profit-sharing plan—won’t cut it) should consider this plan.

Profit Sharing Plan

A profit sharing plan is where an employer can create multiple contribution categories—for example: top-tier for principals, second-level for supervisors, third-level for the rest of the staff—and contributions are made at employer discretion (up to $52,000 annually in 2014).

Who Should Offer It: This plan offers flexibility because the small business owner can modify the contribution amount annually based on available profits, which makes it a great option for small businesses that need to be conservative with their cash assets but would still like to attract talented employees with a retirement package. 

401k

This is one of the most popular, standard retirement plans. Employees save for retirement from their paycheck before taxes are taken out, and employers usually make a matching contribution.

Who Should Offer It: Job seekers are most familiar with this type of plan, so small business owners looking to attract potential employees quickly can advertise this incentive on a job description in one simple one word: 401k. The plan also helps to retain them when small business owners can provide an employer match, which also earns the business tax deductions.

Solo 401k

This plan contains all the features of a standard 401k, but it is designed specifically for self-employed individuals. Only those who claim at least some self-employed income on a 1099 are eligible to open one.

Who Should Offer It: This plan is ideal for small business owners who don’t have employees and who don’t have plans to hire.

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