Have you listened to the news recently? There has been a lot of talk about retirement, especially with the passing of the SECURE Act 2.0. 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 don’t offer one, you’re not alone. That is estimated 74% of small businesses do not offer their employees a retirement plan. But while employers consider retirement plans optional, employees probably don’t. After all, employees will have to come from everywhere 70% to 90% of their pre-retirement income to maintain their standard of living once they retire.
So, what about your small business? To offer a pension scheme or not? Do your employees need one? Before we get into the answers, let’s do a quick overview of retirement plans to make sure we’re all on the same wavelength.
What is a pension scheme?
According to the Department of Labouris a retirement plan “an employee benefit plan established or maintained by an employer […] that provides retirement income or defers income until termination of covered employment or thereafter.”
Retirement plans enable employees to plan for a future without work. After decades of hard work, a jobless future sounds pretty good, right? It does if you have planned accordingly.
There are several plan retirement there you can offer employees. And depending on your state, you may have too laws imposed by the state require you to provide employee pension plans.
If you are not in a state that requires a retirement plan, should you offer one or not? To answer the question, let’s look at some examples of retirement plans.
Examples of pension schemes
Navigating the world of retirement planning can be overwhelming, especially if you’re new to the world of retirement. If your head is already spinning (or about to spin!), here’s an overview of retirement 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 maintain. 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 money. The icing on the cake? Contributions are effective immediately 100% acquiredand employees can access their money from day one.
IRA-based plans include payroll deductions, simplified employee pension (SEP), and employee savings 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, it should be easy to find an IRA that works for you and your employees.
Defined Contribution Plans
Unlike IRA accounts, only employers can create defined contribution plans. Defined contribution plans allow employers, employees, or both to contribute a fixed percentage of an employee’s annual salary. That money is then invested (e.g. stocks, mutual funds, etc.). When the employee retires, he receives a benefit.
Defined contribution plans may include:
When considering a defined contribution plan, research the retirement plan company you work with. Make sure you know what you’re getting into.
*With a Multiple Employer Plan, affiliated small businesses can team up to share some of the cost and administration of a retirement plan. If the cost of retirement plans seems too high for your business, an MEP could be the perfect solution. But MEPs are not for everyone. At this time, they are only available to members of trade associations (e.g., retail and services, mining, trucking, and other industries).
Defined benefit plans
Defined benefit plans were all the rage until the 1980s. In their heyday, defined benefit plans were good 60% of pension schemes for private sector employees. Now the number is drastically lower at 4%. Why the shift? Simply put, it was expensive for companies to maintain the plans and it was difficult to estimate how much money was needed for an employee’s retirement.
Here’s how defined benefit plans work: Companies fund the plans directly from corporate profits, and when employees retire, they reap the benefits. But if the company’s growth slows and profits fall, employees will still have to retire, regardless of how the company is doing. And that’s the problem with defined benefit plans. Declining profits and a generation of employees retiring at the same time can be disastrous.
Many employers have turned to defined contribution plans to save money, as they are often funded solely by employee contributions.
Pros and cons of retirement plans
Consider the pros and cons before deciding whether to offer a retirement plan for your small business.
Benefits of Retirement Plans
Retirement plans can be tricky. But the right plan can give you an edge in hiring and retaining top talent. Keep in mind that your employees will retire at some point. And when they do, they need a lot of money to make ends meet – up to 90% of their pre-retirement income. That’s a lot of money if someone stops working. In general, the benefits for employees are obvious. But what about the benefits for small business owners?
Here are some advantages for the employer when offering retirement plans:
- Employer contributions (if you choose to pay them) are deductible from your business income, reducing your annual tax liability
- Employers setting up a 401(k) for the first time may qualify for business tax credits through the SECURE Act (Setting Every Community Up From Retirement Enhancement) and SECURE Act 2.0
- Employee morale, retention and work ethic can improve when employees feel their future is secure
Disadvantages of retirement plans
Believe it or not, there are some downsides to offering retirement plans to your employees. Downsides can be:
- Some defined benefit plans cannot guarantee employees benefits when they retire
- New employees may have to wait before they start contributing to their plans
- Withholding employee contributions can be tricky without the right payroll software help out
Make a workplace pension plan work for your company and your employees. Choose a safe and reliable retirement plan, decide whether to use a vesting period, and use payroll software with free 401(k) integration to streamline the process.
Final thoughts
Whatever you decide, make sure you do your research. Employee pension plans are not for everyone. Fortunately, there are so many options that you can find the plan that fits your employees’ needs.
A retirement plan can let employees know their future is secure so they can focus on the here and now and the work ahead.
