Only a little over half of private sector workers in the United States are covered by an employer-sponsored retirement plan, and few workers save without one.1 Workers are understanding the importance of retirement savings and this topic is increasingly a concern for legislators. As a result, many states are mandating that employers offer some type of retirement savings plan and workers are looking for job opportunities that offer this type of benefit.
According to a recent report, small firms have cited several main reasons for not offering a retirement plan.2 Some businesses claim they are not firmly established with consistent cash flow to offer a plan. There are worried about the potential administrative responsibilities and costs associated with set up, and the theory that workers would prefer cash compensation or better health insurance in lieu of retirement benefits. With increasing pressure, however, from the government and workers to offer a retirement solution, it is important to be versed in the options available for your small business. You may be surprised to find that offering a retirement solution may not be as costly and difficult to set up as you may think.
Small businesses have several options to choose from when it comes to retirement plan benefits for their employees. This article is meant to clear up confusion about the various retirement options, whereby we will provide an overview of each type of plan and include a comparison chart outlining key features so you can make a more informed decision about the solution that fits your business needs best.
The Retirement Landscape
The three most common small business retirement solutions are:
- SEP IRA
- SIMPLE IRA
A 401(k) plan gives employees a tax break on money they contribute. Contributions are automatically withdrawn from employee paychecks and invested. The investment options within the plan are selected by you as the employer or delegated fiduciary, and from that predetermined selection, an employee may choose the funds for their individual 401(k) account. Many companies often offer what’s called a 401(k) match, in which they contribute additional money on top of the employee contributions as a benefit and incentive for employees to increase their own contributions. Employer contributions in 401(k)s are optional.
Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRA are retirement plans that allow employees to save for retirement on a pre-tax basis. In comparison to a 401(k), SIMPLE/SEP IRAs have fewer plan design options and features but are easier to set up and administer and offer a cost-effective way for a business to start a retirement plan. However, employees are responsible for managing their own investments in a SIMPLE/SEP IRA, so it may be a good idea for them to work with a Financial Advisor who can discuss investment choices as well as savings strategies.