Have you listened to the news lately? We talked a lot about retirement, especially with the adoption of the SECURE 2.0 law. Well guess what? Your employees have probably heard the same things. And chances are they have more questions about retirement than usual.
As a small business owner, it can be difficult to know if you should offer a retirement plan. If you’re not offering one, you’re not alone. We think that 74% of small businesses do not offer pension plans to their employees. But even if employers see pension plans as optional, workers probably don’t. After all, employees will need anywhere 70% to 90% of their pre-retirement income to maintain their standard of living after retirement.
So what about your small business? Should you offer a retirement plan or not? Do your employees need it? Before we get to the answers, let’s do a quick overview of pension plans to make sure we’re all on the same page.
What is a retirement plan?
According to Ministry of Laboura pension plan is “an employee benefit plan established or maintained by an employer […] that provides retirement income or defers income until the end of covered employment or beyond.
Retirement plans allow employees to plan for a future without work. After decades of hard work, a future without work sounds pretty good, right? It does if you have planned for it.
There are many retirement plans there you can offer employees. And depending on your condition, you might have state-imposed laws requiring you to provide pension plans to employees.
If you are not in a state that requires a retirement plan, should you offer one or not? To help answer the question, let’s look at some examples of retirement plans.
Examples of pension plans
Navigating the world of retirement planning can be overwhelming, especially if you’re new to retirement. If you’re already feeling dizzy (or about to!), here’s a look at pension plans.
Pension plans fall into three categories:
- IRA-Based Plans
- Defined contribution plans
- Defined benefit plans
Let’s take a closer look at these plans and what they mean for small business owners and their employees.
IRA-Based Plans
A IRA is an individual retirement account that is easy to start and manage. Employees can set up an IRA as part of their private plan, but companies can also offer certain types to employees. IRAs allow employees to choose their contributions and when to withdraw funds. The icing on the cake ? Contributions are immediately 100% grantedand employees can access their funds from day one.
IRA-based plans include Payroll Deduction, Simplified Employee Pension (SEP), and Employee Savings Incentive Plan (SIMPLE). These plans have their differences, including employer eligibility, who contributes, minimum employee requirements, steps to set up the plan, and more. With so many choices, finding an IRA that works for you and your employees should be easy.
Defined contribution plans
Unlike IRA accounts, only employers can set up defined contribution plans. Defined contribution plans allow employers, employees or both to contribute a set percentage of an employee’s annual salary. This money is then invested (eg stocks, mutual funds, etc.). When the employee retires, he will receive distributions.
Defined contribution plans can include:
When considering a defined contribution plan, research the pension plan company you work with. Make sure you know what you’re getting into.
* A multi-employer plan allows related small businesses to join together to share some of the costs and administration of a pension plan. If pension plan costs seem too high for your business, a MEP may be the ideal solution. But MPs aren’t for everyone. Currently, they are only available to members of trade associations (eg retail and service, mining, trucking and other industries).
Defined benefit plans
Defined benefit plans were all the rage until the 1980s. In their heyday, defined benefit pension plans represented 60% pension plans for private sector workers. Now the number is considerably less than 4%. Why the change? To put it simply, it was expensive for companies to maintain the plans and difficult to estimate how much money was needed for an employee’s retirement.
Here’s how defined benefit plans work: Companies fund plans directly from company profits, and when employees retire, they reap the benefits. But, if business growth slows and profits decline, employees will still have to retire, no matter how well the business does. And that’s the problem with defined benefit plans. Declining profits and a generation of employees simultaneously retiring could be catastrophic.
Many employers have switched to defined contribution plans to save money, as they are often funded solely by employee contributions.
Advantages and disadvantages of retirement plans
Before deciding whether or not to offer a retirement plan for your small business, first check the pros and cons.
Benefits of pension plans
Retirement plans can be tricky. But the right plan can give you an edge in hiring and retaining top talent. Remember that your employees will retire at some point. And when they do, they’ll need a good amount of money to make ends meet, up to 90% of their pre-retirement income. It’s a lot of money when someone is no longer working. Generally, the benefits for employees are obvious. But what about the benefits for small business owners?
Here are some of the benefits for employers of offering pension plans:
- Employer contributions (if you choose to pay them) are deductible from your business income, reducing your annual tax liability
- First-time employers setting up a 401(k) may be eligible for business tax credits through the Setting Every Community Up From Retirement Enhancement (SECURE) Act and the SECURE 2.0 Act
- Employee morale, retention, and work ethic can improve when employees feel their future is secure
Disadvantages of Pension Plans
Believe it or not, there are downsides to offering retirement plans to your employees. Negatives can include:
- Some defined benefit plans may not guarantee benefits to employees when they retire
- New employees may have to wait to start contributing to their plans
- Withholding employee contributions can be tricky without the right Payroll Software help
Make a workplace pension plan work for your business and your employees. Choose a safe and reliable retirement plan, decide if you want to use a waiting period, and use payroll software with free 401(k) integration to streamline the process.
Final Thoughts
Whatever you decide, be sure to do your research. Employee pension plans are not suitable for everyone. Fortunately, there are so many options that you’ll be able to find the plan that meets your employees’ needs.
A retirement plan can let employees know that their future is secure so they can focus on the here and now and the work ahead.