In this 5-minute read:
- Employees expect retirement plans
- What are attractive retirement plan features that will entice new candidates?
- What are the best retirement options to offer your employees?
Obviously, many small businesses can’t afford or don’t need to offer retirement benefits to their employees. But many do, and it’s something that, as you grow, you’ll want to take into consideration. When you get to that point in your business’s journey, choosing a retirement plan for your employees can be a difficult decision, with all of the information and different options available.
There’s definitely a lot to think about, but as long as you keep your employees in mind as you weigh your options, you’ll make the right choice. In this article we’ll walk through some of the best retirement plans that today’s small businesses are offering to their employees.
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Quality employees expect retirement plans
Retirement plans have become more than just a perk for people who are looking for good, long-term jobs… they’re table stakes these days. You can increase morale and woo the best candidates by offering competitive retirement benefits to your employees.
What retirement plan features will attract great candidates and keep current employees loyal?
As you look through your options, think about the features that will appeal to potential candidates and your current employees, as well as which plans can benefit you as an owner. This can be (and often is) the way business owners go with these plans, as there are tax breaks and other benefits when you combine owner and employee plans in some cases.
Check out this article: What are my retirement plan options if I’m self-employed or own my own business?
The most attractive features in most retirement packages are the following:
- Employer match
- Investment advice and expertise
- Mobile access
Employer match
Most good retirement plans offer employees some kind of employer match on the employee’s contribution to their account. Generally, the employer will match up to a certain percentage of the employee’s contribution, allowing the employee to immediately make more money on their savings and encouraging them to plan for the future.
Investment advice and expertise
Retirement contributions are typically handled by some kind of investment firm. Not every person is interested in becoming a pro at investing their funds, so these firms will handle the retirement accounts and wisely invest employee contributions to help them grow their accounts.
Because of this, it is appealing to have an expert, whether in-house or not, who is available to consult about retirement contributions and accounts. Be sure to ask potential plan managers about the fees that are rolled into this kind of service. It can be beneficial for your employees, but it may eat into their total portfolio growth.
Mobile access
The world is a largely digital place, and people expect to have access to everything online and from their mobile devices. Your employees should be able to monitor their retirement accounts online or from an app at the tap of their fingers. Many plans allow investors to make changes, rebalance their portfolio, and more, all from an app or website.
What are the best types of retirement plan options to offer your employees?
There are several retirement plan options out there, and you should consult a financial expert to help you determine the best plan for your business and employees, particularly as different states sometimes have different regulations and one type may be more beneficial than another in your area for that reason. That being said, these are some of the most common plans that small businesses provide.
SEP IRA
A SEP IRA, or simplified employee pension IRA, is an individual retirement account that is best suited for businesses with very few employees. The reason for this is that the contributions are not determined by the employees, but by you, the owner.
SEP IRA’s require you and your employees to contribute the same percentages of their income into their retirement accounts. With only a few employees all making similar wages, this can be a smart choice. But as your company grows and you have more employees with different annual incomes and varying circumstances outside of work, this type of plan will be less appealing.
SIMPLE IRA
A SIMPLE IRA may be one of the most common plans offered by small businesses (of fewer than 100 employees). When you have more than just a few employees, this plan becomes more appealing, and it allows you to take advantage of the same plan yourself as the business owner.
The benefit of a SIMPLE IRA over a SEP IRA is that your employees each get to choose how much they want to contribute into their individual accounts (up to a certain percentage and amount each year).
You can also offer matches on your employee’s contributions, which is an attractive added benefit for employment to many potential candidates.
The downside of a SIMPLE IRA comes when you have employees (any maybe yourself) who are bringing in large annual incomes. In 2020, employees with SIMPLE IRAs can only contribute up to $13,500 in their account for the year. So, if most of your employees work part-time or make lower wages, this may be the best option for you.
401(k)
A 401(k) is a great plan to offer when you have employees with larger annual salaries. 401Ks allow your employees (and you) to contribute more into their retirement plans than a SIMPLE or SEP IRAs allow.
The maximum 401(k) contribution limit for 2020 is $19,500 or 25% of a person’s annual income (whichever is less). Your business can also match up to a certain percentage of each employee’s contributions.
The biggest thing to keep in mind with 401Ks is that the more employees you have, the more complicated the process of offering this plan becomes. It requires a lot of paperwork to make sure that you are providing good, balanced benefits to each of your employees with your 401(k) package.
401(k) plans require something called “discrimination testing,” which basically ensures that your highest-paid workers aren’t getting better retirement benefits than those with lower wages. Lower paid workers generally aren’t able to contribute as much to their retirement accounts, so if you have several lower-wage employees and several higher-wage employees, constraints may be required on your higher-paid employees’ contributions. However, sometimes you can avoid this “discrimination testing” with your employer match rates.
Choosing a retirement plan for yourself and your employees is a big decision, and every option should be weighed so that you can find the best solution for your business. Talk to different investment counselors and retirement plan providers and reach out to a financial consultant to help you make the best choice for you and your employees.
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