If you don’t have a retirement plan available, you may lack the competitive edge needed to attract employees who will stay for the long haul. That said, how can a business owner begin to select from the plethora of retirement options available in the marketplace?
The answer lies in looking at the size of your company, determining whether you want to fund the plan with tax-deductible employer contributions and deciding which employees you want covered, says Michael J. Gheen, a CPA and associate director with SS&G Investment Services LLC of Akron, Ohio.
Smart Business spoke with Gheen about the advantages of offering a retirement plan to employees and the necessary steps a business owner needs to take to create the right retirement plan for a company.
What are the advantages of having a company retirement plan?
If you don’t have one, you will be considered behind the times and at a disadvantage from a recruiting standpoint. Employees are keenly aware that they may not be able to rely on Social Security for retirement so they are looking for employers to provide retirement plans.
How can a business owner choose a plan that best suits a company and its employees?
A lot is dependant on how much money the business owner is willing to spend and what the goals are. If the employer can’t afford to make contributions, the easiest way to set up a retirement plan is the Simplified Employee Pension Plan (SEP IRA). The SEP allows employers to set aside money in retirement accounts for everyone in the company (including the business owner).
Under the SEP, an employer contributes directly to traditional individual retirement accounts. The SEP is good for small businesses because it does not have the startup and operating costs of a traditional retirement plan. And it allows deductible contributions up to 25 percent of company payroll.
A better plan to start out with would be the Savings Incentive Match Plan for Employees (SIMPLE IRA) which allows employee contribution and it mandates that an employer match that contribution, which is a more desirable option for employees. The employee matches up to 3 percent of an employee’s salary.
The ongoing costs of keeping the SEP or SIMPLE plans in place are minimal. And, as the company grows, the business owner may want to move into more complex plans such as profit sharing or a 401(k) plan.
What kind of flexibility is available with profit sharing or 401(k) plans that are not with SEP or SIMPLE plans?
In traditional 401(k) or profit sharing, the employer can determine when the employee will be fully vested, whereas with the SIMPLE or SEP plans any money put into the plan is fully vested from day one. You can see why employers may not like this because the employees can pull the money out at any time for any reason, with penalties, of course.
What are some considerations a company needs to make when selecting a retirement plan?
Not only do you need to consider how much flexibility you want, but who you want to handle the investment and what kind of investment platform you want, such as mutual funds. Financial advisers can help the company owner pick a platform that makes the most sense for the business.
The business owner also has to decide who will be the trustee of the plan — and this is usually the business owner, CFO or director of human resources, or even a third party. Business owners also need to decide the eligibility requirements for the retirement plan; do they want the eligibility to begin day they are hired or a year later? If you are in a high-turnover industry you may want to consider a minimum service requirement.
Is it necessary to hire a financial or retirement plan professional to help set up and run the plan?
On the investment side, it’s strongly recommended that you hire a professional. The last thing you want to do is give advice about investments and open your company up to exposure in an industry that is heavily scrutinized by the IRS and the Department of Labor. The investment professional needs to be involved not only to setup the plan but monitor it on a ongoing basis with the business owners and the employees.
Michael J. Gheen, CPA, is an associate director of SS&G Investment Services LLC, a division of SS&G Financial Services Inc. Contact Gheen at MGheen@SSandG.com or (800) 871-0985. SS&G Investment Services LLC and SS&G Financial Services Inc. are not affiliated with Multi-Financial Securities Corp. or ING. Securities offered through Multi-Financial Securities Corp., member NASD, SIPC. .