Choosing the right retirement plan for employees is a daunting
task for business owners. They have to determine a plan’s tangible
and intangible ROI to their business, what type of plan would work
best for their employees, or if implementing one even makes
sense. The list goes on.
Other factors to consider include whether the plan selected
should be participant- or trustee-directed, include stocks, bonds,
mutual funds or a mix. Owners might want to consider a retirement plan that allows participants the option of buying company
stock. The number of retirement plans available seems endless
and the final choice is not always easy to make.
Smart Business spoke with Robert D. Coode of Skoda, Minotti
& Co. Financial Services to learn how business owners can find
their way through the retirement plan maze and provide a significant benefit to their employees in the process.
How does creating and maintaining a retirement plan benefit business owners?
When it comes to implementing a retirement plan, some of the
key benefits to a business owner include attracting employees,
retaining employees and, of course, having the ability to defer
some of his or her taxable income. The biggest benefit is probably
the tax advantages associated with retirement plans.
Contributions made to the retirement plan are deductible when
deposited and grow from there on a tax-deferred basis. Also, the
owner may be eligible for a tax credit to set up and administer a
retirement plan. One side note to setting up and maintaining a plan
is that it needs to be expressed to your employees that the plan is
a benefit not an entitlement. Often, that is best done through the
help of your financial adviser.
What types of plans are available to employers?
Retirement plans for the most part are either IRA-based or ‘qualified’ in nature. An example of an IRA-based plan would be a
Simplified Employee Pension (SEP) or a SIMPLE (Savings
Incentive Match Plan for Employees). Profit-sharing plans, 401(k)s
and defined benefit plans are common examples of qualified plans.
Each plan has its own set of advantages and disadvantages
depending on the business owner’s situation. With that being said,
qualified plans are generally more complex to set up and maintain
and more costly to run than their IRA-based counterparts, since
qualified plans have to comply with specific Internal Revenue
Code as well as ERISA (Employee Retirement Income Security
Act of 1974) requirements to qualify for their tax favorable status.
Furthermore, in a qualified plan, the employees may be required to
work a certain number of years before they become fully vested in
the company’s matching or profit-sharing contributions.
Conversely, with IRA-based plans, the employees own the company’s contributions immediately.
How can employers determine which retirement plan is best for the
company?
Employers always have the option of walking down this path by
themselves. They can study the vast array of plans and all of their
idiosyncrasies and try to decide on the right one. However, we feel
as though the owner is best served by hiring financial professionals who will walk them through the maze of plans to come up with
the right fit. In the end, this could end up saving the employer a lot
of time and money and lets them focus on what they do best,
which is run their business.
How often should employers review their plan?
Generally, it’s a good idea that employers review their plan annually. Conducting an annual plan review helps to assure that the
plan trustee — usually the business owner — is handling their fiduciary responsibilities. The review process should include the
employer, financial adviser and the third-party plan administrator.
A few of the topics to be covered would include mutual fund lineup, fund performance, fees associated with those funds as well as
costs to run the plan from an administrative level. The point of the
exercise to make sure that the plan in place is the best one possible for both the employer and the employees.
What should employers be looking at when evaluating retirement
plans?
With a wide variety of plans out there, each with its own positives
and negatives, it’s very important that employers define their goals
before making a decision. A few things to consider would be making sure the plan they choose allows them to maximize the amount
that can be saved annually. Next, is the employer looking for a plan
that allows just employee contributions, employer contributions
or both? Is it important to allow employees to make both pre-tax
as well as Roth contributions to the plan? Next, most business
owners are looking for the flexibility to skip employer contributions in some years. And, with a wide variety of choices comes a
wide array of prices, so shop carefully.
How important is the cost of the plan?
Naturally, employers must consider cost versus benefits when
selecting a plan. You get what you pay for. In many instances,
lower cost equates to reduced services. During the plan evaluation,
make sure that fees and expenses are disclosed and everyone’s
roles are defined, from implementation to ongoing servicing and
employee education.
ROBERT D. COODE is a principal and registered representative at Skoda, Minotti & Co., a CPA,
business and financial advisory firm, based in Mayfield Village. Reach him at (440) 449-6800 or
[email protected].
