Did you hear the news recently? There has been a lot of talk about retirement, especially with the passage of the SECURE Act 2.0. Your employees have probably heard the same thing. And they’re probably getting more questions about retirement than usual.
As a small business owner, it can be difficult to decide if you should offer a retirement plan. If you don’t provide it, you are not alone. He estimated that 74% of small businesses do not offer retirement plans to their employees. But while employers see retirement plans as an option, workers probably don’t. After all, an employee needs 70% to 90% of her pre-retirement income to maintain her standard of living in retirement.
What about your small business? Do you need to offer a retirement plan? Do your employees need it? Before we get to the answer, let’s quickly outline retirement planning to make sure everyone is on the same page.
What is a retirement plan?
According to the Department of Labor, a retirement plan is “an employee benefit plan established or maintained by an employer.” […] Provide retirement income or defer income until the end of covered employment or beyond. ”
Retirement plans allow employees to plan for a job-free future. After decades of hard work, don’t you think a jobless future looks pretty good? If you plan accordingly.
There are several retirement plans that you can offer your employees. Additionally, some states have state laws that require you to provide retirement plans for your employees.
If I’m not in a state that requires a retirement plan, should I offer one? To answer this question, let’s look at some examples of retirement plans.
Examples of retirement plans
Navigating the world of retirement planning can be overwhelming, especially if you’re new to the world of retirement. Your head is already spinning (or about to spin!) If so, here’s an overview of your retirement plan.
Retirement plans fall into three categories:
- IRA-based plan
- defined contribution plan
- defined benefit plan
Let’s take a closer look at these plans and what they mean for small business owners and their employees.
IRA-based plan
An IRA is a personal retirement account that is easy to start and maintain. Employees can set up an IRA as part of their private plan, but companies can also offer specific types to employees. IRAs allow employees to choose their contributions and when they withdraw their funds. cherry on top Contributions are immediately granted to him 100% and employees have access to funds from day one.
IRA-based plans include Payroll Deduction, Simplified Employees’ Pension (SEP), and Savings Incentive Match Plan for Employees (SIMPLE). These plans differ in terms of employer eligibility, contributors, minimum employee requirements, steps to set up the plan, and more. With so many options, finding the right IRA for you and your employees is easy.
defined contribution plan
Unlike IRA accounts, only employers can create defined contribution plans. Defined contribution plans allow employers, employees, or both to contribute a percentage of an employee’s annual wages. That money is then invested (e.g. stocks, mutual funds, etc.). When an employee retires, they receive a distribution.
A defined contribution plan can include:
When considering a defined contribution pension, research the retirement plan company you work for. Make sure you know what you are getting.
*Multiple Employer Plans allow related small businesses to band together to share a portion of the costs and administration of a retirement plan. If the cost of a retirement plan seems too high for your business, MEP may be the perfect solution. But MEP is not for everyone. Currently only available to members of trade associations (eg retail and services, mining, trucking, and other industries).
defined benefit plan
Defined benefit plans were all the rage until the 1980s. In Hay Day, defined benefit pensions accounted for his 60% of private sector workers’ pension plans. Today, that number has dropped significantly to 4%. why shift? Simply put, it was costly for companies to maintain plans and difficult to estimate how much they would need to retire their employees.
Here’s how the defined benefit plan works: Employers fund plans directly from company profits and receive benefits when employees retire. However, if business growth slows and profits decline, employees should retire regardless of business conditions. And that’s the problem with defined benefit plans. Declining profits and simultaneous retirement of generations of employees can spell disaster.
Many employers have switched to defined contribution plans to save money, as they are often funded solely by employee contributions.
Pros and Cons of Retirement Plans
Before deciding whether to offer a retirement plan for a small business, first check the pros and cons.
Advantages of the Retirement Plan
Planning for retirement can be difficult. But with proper planning, you can gain an edge in recruiting and retaining top talent. Remember, your employees will leave at some point. If that happens, they will need a lot of money to make ends meet. This represents up to 90% of your pre-retirement income. That’s a lot of money when someone is no longer working. In general, the benefits for employees are clear. But what about the benefits for small business owners?
Here are some of the employer benefits of offering a retirement plan:
- Employer contributions (if you choose to pay them) can be deducted from your business income, thus reducing your annual tax liability.
- Employers setting up a 401(k) for the first time may be eligible for a business tax credit through the SECURE Act (Setting Every Community Up From Retirement Enhancement) and SECURE Act 2.0.
- Employee morale, retention and work ethic improve when employees feel their future is secure.
Disadvantages of Retirement Plans
Believe it or not, there are some downsides to offering your employees a retirement plan. Negatives may include:
- Some defined benefit plans cannot guarantee benefits to employees upon retirement
- New hires may have to wait until they start contributing to the plan
- Withholding employee contributions can be difficult without the right payroll software
Make a workplace retirement plan work for your business and your employees. Choose a secure and reliable retirement plan, decide whether to use a waiting period, and streamline the process with payroll software with free 401(k) integration.
final thoughts
Whatever you decide to do, be sure to do your research. Employee retirement plans are not one-size-fits-all. Luckily, with so many options, you can find a plan that fits your employee’s needs.
Retirement plans let employees know their future is secure, so they can focus on the job at hand here and now.