12/ 20/ 2006
by Marcia Passos Duffy
These days, employees want more than just a good salary. You can bet that even those fresh out of college or an MBA program are savvy enough to know that they can't rely on Social Security for retirement; they are looking for jobs that have perks that go beyond a good paycheck and health coverage.
According to recent surveys, the top two benefits to employees are medical insurance and paid vacation/holidays, followed closely by employer-paid pensions and retirement savings plans. If your company does not have some kind of retirement plan, it lacks the competitive edge to attract employees who will stay for the long haul.
While you, as a small-business owner, understand the advantages of creating a retirement plan for your employees, how can you begin to select from the options available in the marketplace, yet still keep your bottom line in check? The answer lies in using the plethora of retirement options available to create a plan that is just right for the size and financial situation of your company.
How much can you spend?
When you create a retirement plan, a lot is dependant on how much money the business owner is willing to spend and what the goals are. If you can't afford to spend a penny (yet), you can start at the bottom by offering a Simplified Employee Pension Plan (SEP IRA) to at least offer some kind of retirement option to employees. The beauty of these simple retirement plans is that, as your business grows, you can also upgrade to more complex plans that are more desirable to employees.
If money is tight, two good starting points for small-business owners to consider are Simplified Employee Pension Plans (SEP IRA) and Savings Incentive Match Plan for Employees (SIMPLE IRA). Those businesses with less than 100 employees particularly like these plans because the costs of keeping the SEP or SIMPLE plans in place are minimal. And, as the company grows, the business owner can move these plans into more comprehensive retirement options like profit sharing or a 401(k) plan.
Simplified Employee Pension Plan (SEP IRA)
The SEP IRA allows your employees to put money directly into a traditional individual retirement account and does not require employer contributions. The SEP is good for small businesses because it does not have the start-up and operating costs of a traditional retirement plan. The plan is funded with tax-deductible employer contributions, and you must offer it to all eligible employees (all employees who have worked for you for three of the past five years and who earned at least $450 from you last year). With a SEP, there is no "plan document," you don't need to file annual reports with the IRS and contributions can vary from year to year.
Savings Incentive Match Plan for Employees (SIMPLE IRA)
This is actually a better plan to start out with (and more desirable for employees) because it allows employee contribution and mandates that the employer matches that contribution—up to 3 percent of an employee's salary. The SIMPLE IRA's annual contributions for employees (for 2006, anyway) are limited to $10,000 (or $12,500 if the employee is 50 or older as of Dec. 31, 2006) plus the employer matching contribution (of up to 3 percent of an employee's salary).
Profit-sharing and 401(k) plans
The advantage of these plans over the SIMPLE or SEP plans is that the employer can determine when the employee will be fully vested (in SIMPLE and SEP plans, the employee is fully vested the day they are employed). However, these plans require more costs to the employer, including discrimination testing by an outside agency, annual IRS filings and a formal plan. But there is much more flexibility in these more complex plans. For example, profit sharing gives the employee a piece of the company's profits (determined by the business owner) and can vary from year to year based on the businesses' performance. A 401(k) plan is for businesses with more than 25 employees, and the vesting is determined by the employer. There is the option of employer contributions (match is not required) and the combined employer/employee contribution cannot exceed $44,000 ($49,000 if employee is 50 or older). However, traditionally, administration of a 401(k) has been expensive, but increasingly, annual fees to maintain this plan are dropping because of competition among 401(k) providers.
Hire a financial advisor
Not only do you need to consider how much flexibility you want, but who you want to handle the investment and what kind of investment platform you want (such as mutual funds), who will be the trustee of the plan, eligibility requirements for the retirement plan, and if you want provisions for hardship or allow for loans that allows the employee to access their money. A financial advisor can help with these decisions and help create and monitor the plan.
