Have you listened to the news lately? There has been a lot of talk about retirement, especially with the passage of the SECURE Act 2.0. Well guess what? Your employees may have heard the same thing. Chances are, they have more questions about retirement than usual.
As a small business owner, it can be difficult to decide whether you should offer a retirement plan. If you don’t, you’re not alone. An estimated 74% of small businesses do not offer retirement plans to their employees. But even if employers consider retirement planning optional, workers may not. After all, employees will need 70% to 90% of their pre-retirement income to maintain a standard of living in retirement.
So, what about your small business? Should you offer a retirement plan? Does your employee need one? Before we get to the answer, let’s take a quick look at retirement planning to make sure we’re all 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 insured employment ends or longer. “
Retirement plans allow employees to plan for a future without work. After decades of trying, a future without jobs sounds like a good idea, right? It will do so if you plan accordingly.
You can offer your employees a variety of retirement plans. Depending on your state, you may have state-mandated laws requiring you to provide an employee retirement plan.
If you’re not in a state that requires a retirement plan, should you provide one? To help 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 are new to the world of retirement. If you’re already starting to get dizzy (or about to!), here’s an overview of retirement planning.
There are three types of retirement plans:
- IRA-Based Plans
- defined contribution plan
- defined benefit plan
Let’s take a closer look at these programs and what they mean for small business owners and their employees.
An IRA is an individual retirement account that is easy to start and maintain. Employees can set up an IRA as part of their private plan, but businesses can also offer employees certain types of IRAs. IRAs allow employees to choose their contributions and when to withdraw funds. The cherry on top? Donations vest 100% immediately, and employees have access to their funds from day one.
IRA-based plans include payroll deductions, the Simplified Employee Pension Plan (SEP), and the Employee Savings Incentive Matching Plan (SIMPLE). These plans vary in terms of employer eligibility, contributors, minimum employee requirements, steps to develop a plan, and more. With so many options, finding an IRA that’s right for you and your employees should be 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 the employee’s annual salary. This money is then invested (eg, stocks, mutual funds, etc.). When employees retire, they will receive distributions.
Defined contribution plans can include:
When considering a defined contribution plan, research the retirement planning companies that work with you. Make sure you know what you’re getting into.
*Multi-employer plans allow related small businesses to band together to share some of the cost and administration of the retirement plan. If the cost of retirement planning is too high for your business, a MEP may be the perfect solution. However, MEPs are not for everyone. Currently, they are only available to members of trade associations (for example, retail and service, mining, trucking and other industries).
defined benefit plan
It wasn’t until the 1980s that defined benefit plans became all the rage. During boom times, defined-benefit pensions made up 60 percent of private-sector worker pension plans. Now, that number has dropped significantly to 4%. Why change? In short, it is costly for businesses to maintain these plans, and it can be difficult to estimate how much employees will need to retire.
Defined benefit plans work like this: Businesses fund the plan directly from company profits, and when employees retire, they receive benefits. However, if business growth slows and profits fall, employees will still need to retire regardless of the business. That’s the problem with defined benefit plans. Falling profits and simultaneous retirement of a generation of workers could spell disaster.
Many employers turn to defined contribution plans to save money, as they are often fully funded by employee contributions.
Pros and Cons of Retirement Planning
Before deciding whether to offer a retirement plan for your small business, understand the pros and cons.
Benefits of Retirement Planning
Retirement planning can be tricky. But the right plan can give you an edge in recruiting and retaining top talent. Remember, your employees will retire at some point. When they do, they’ll need a lot of money to stay afloat — up to 90% of their pre-retirement income. That’s a lot of money when someone is no longer working. In general, the benefits to employees are obvious. But what about the benefits for small business owners?
Here are some employer benefits that offer retirement planning:
- Employer contributions (if you choose to contribute) can be deducted from your business income, 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 (Let Every Community Benefit from Retirement Enhancements) and SECURE Act 2.0
- When employees feel their future is secure, employee morale, retention and work ethic improve
Disadvantages of Retirement Planning
Believe it or not, there are some downsides when offering retirement plans to your employees. Negative factors may include:
- Some defined benefit plans do not guarantee benefits when employees retire
- New hires may have to wait before they can start contributing to their programs
- Withholding employee donations can be tricky without the right payroll software to help
Create a workplace retirement plan that works for your business and your employees. Choose a safe and secure retirement plan, decide whether to use a waiting period, and streamline the process with a payroll software with free 401(k) integration.
Whatever decision you make, be sure to do your research. Employee retirement plans are not one-size-fits-all. Fortunately, there are many options, and you’ll be able to find a plan that fits your workforce’s needs.
Retirement planning lets employees know their future is secure so they can focus on the here and now and the work in front of them.