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Even for small businesses, it is easy and inexpensive to set up an employee retirement plan.
These programs also offer tax benefits to employees and companies, which means more money for everyone.
These benefits are a great way for you to attract top talent and give them a reason to stay.
The sooner you get started, the better.
Let me first walk you through the various types of employee retirement plans. There are many options for saving for retirement, not just the 401(k), which can help people save for their post-career lives. Some plans are made specifically for small businesses.
We’ll then discuss what you should consider when choosing a provider to manage your employee retirement plans.
While there is a lot to learn, there are still some things to do.
Retirement is the biggest expense in a person’s life. Employers can provide security for employees who are thinking about the future of their families by offering a savings plan.
Continue reading to learn how you can get better candidates and happier employees every year, as well as serious tax-breaks.
Top 4 Options for Employee Pension Plans
- Guideline – The easiest way to get started with a 401(k).
- Human Interest – The Best 401(k), Small to Medium Sized Organizations
- Large organizations will find the Nationwide option to be the best
- Vanguard – Best SIMPLE IRA
Different Types Of Employee Retirement Plans
Employers need to be aware of a few key details when choosing the right type of employee retirement plan.
Despite all the regulations and tax laws involved, it comes down to the structure of each plan. This is something that doesn’t require an MBA.
You’ll also have someone to help fill in gaps, forecast the future of each plan, and point you to a better plan if you don’t like the one you have.
Let’s dig in.
Qualified employee retirement plans, which are those with tax advantages, fall in two main categories. Only one is widely used today.
- Employers manage all defined benefits plans. These plans are also known by the name pensions. Each month they pay out a fixed benefit. These were very popular in the 1980s but have been phased out by employers due to their high cost.
- Today, defined contribution plans have become more popular. These plans allow employees to contribute money from their paychecks towards their retirement. Employers may also be eligible to match employee contributions.
There are two types of contributions: the employees and the company. The tax treatment for that money varies from one plan to another. Although companies have some flexibility when implementing plans, many of the basic rules are established by the federal government.
Important Note: Each plan has a different limit for the amount that employees and employers can contribute each calendar year. These limits are subject to change as the government adjusts for increases in cost-of living. Current limitations on contributions and benefits are set by the IRS for all types of employee retirement plans.
It is important to fully understand the basics of each plan, and how they will save you money over the long-term.
Let’s look at the most popular types of defined contribution plans, their differences, and what kinds of companies use them. These are the ones I will be covering:
- Plans with 401(k).
- Roth 401(k), plans
- Plans for SEP
- SIMPLE IRA
- Payroll deduction IRA
- Profit sharing plans
Although there are many options for employee retirement plans that I haven’t listed here, these are the most popular.
An employer-sponsored retirement savings plan called a 401(k). The employer may match the employee’s contribution to the account.
Contributions are Pre-tax. This means that they aren’t subject to tax until the employee withdraws funds. This is usually after they retire. Employees also have a lower taxable income every year due to the amount they contribute.
A 401(k), which is a tax-deferred account, allows an employee to set up their retirement savings on autopilot. Each month, a small portion of each paycheck’s gross goes directly into the employee’s nest egg.
While companies may match employee contributions, it does not have to be 100%. The formula that they use is often the basis of their match. A common example of a matching formula is where an employer matches half of the contributions up to 6% of the salary.
Matching contributions are exempt from tax, so a company can include a 401(k), which will help both the employer and employee save more in the future.
It gets even better.
New legislation from 2019 has increased the tax credit available to businesses who start a 401k. It is now up to $5,000, and not less than $500 per annum for three years. There is also $500 additional for autoenrollment. You can use the credit to pay for setup and administrative expenses.
A 401(k), unlike other plans, requires more paperwork to be set up. This tax credit can ease the process and help you get things done properly. Once a 401(k), plan is established, employees can contribute more each year to it than any other type of plan.
The company plan will determine the investment options for a retirement plan. Although employees may have some control over where the money is invested, they will usually only be able to choose from a small number of options.
A 10% penalty will be applied to any withdrawals made before the age of 59 1/2. This is in addition to the taxes due. However, workers over 55 can avoid this penalty by withdrawing funds early. This does not include retirement plans with former employers, but only the 401(k), of the job they have left.
People who are in “immediate and severe financial need” can also use their 401(k) money without penalty to pay for medical treatment, foreclosure or eviction prevention.
Two common versions of the 401(k), available to certain types of workers, are:
- 403 (b) plans for employees of public schools and colleges, universities, churches, tax exempt organizations, and non-profit organisations
- 457 (b) plans for employees of state or local governments
These plans, with the exception of some special rules are identical to the traditional 401(k).
Roth 401K Plans
Employers might choose to sponsor a Roth401(k), which is almost identical to a traditional401(k), except that contributions are made after tax.
This is a significant change with pros and cons.
Employers are not allowed to deduct contributions from taxes. This means that they don’t reduce their tax burden while they save. Traditional 401(k)s have this benefit.
A Roth 401(k) allows them to withdraw their earnings and contributions tax-free when they retire.
A nice perk is the tax-free withdrawals that can be made after the plan has been in place for five years. While you would have to pay taxes on your earnings for early withdrawals, it is not applicable to the money that you have already paid taxes.
This is the tradeoff. Roth 401(k), you don’t pay taxes right away, but you can retire with all your earnings and savings.
For young employees who believe they will earn more in the future, this could be a great option. They pay income taxes now, and don’t have to pay when they are in a higher tax bracket.
However, it’s not for everyone. Senior employees might not wish to pay taxes at the current bracket. It’s probably better for them to take the deductions and pay when they retire.
Many companies offer both a Roth 401(k) and a traditional 401(k) option, allowing employees to decide how they want to save for retirement.
An employer may offer a simplified employee pension (SEP). This is a type IRA that allows for individual retirement.
It is much simpler to manage than a traditional 401(k), making it ideal for small businesses and self-employed people.
Employers can contribute to the SEP, and these contributions are not tax-deductible. The money grows tax-deferred and is kept in an IRA named by the employee.
A SEP has higher contribution limits than a personal IRA. This allows people to save more money than they would otherwise be able to. It is also easier to meet income limits than for personal IRAs, making it a good option for those with high incomes.
SEP plans offer flexibility which is a plus. The company must contribute the same amount to all employees every year. However, that percentage can be adjusted.
An employer might choose to contribute the maximum amount during a good year. However, they may not contribute anything if there is cash crunch.
These plans are easy to manage and allow businesses to contribute in flexible amounts every year. SEP plans are great options for small businesses who want to grow and save money.
SIMPLE IRAs are an employee retirement plan that is available to businesses with 100 or fewer employees. It doesn’t offer any other qualified retirement plans, such as a 401(k).
SIMPLE stands to “Savings Incentive Match PLan For Employees” and is appropriately named as it requires very little administrative paperwork. It is a simple plan that only requires annual disclosures.
Employers are required to make a contribution to the SIMPLE IRA. Employees have the option to contribute a portion from their salaries.
- Match employee contributions dollar-for-dollar up to 3% an employee’s compensation
- All eligible employees are required to contribute 2% of their compensation, regardless of whether they make contributions.
It is ideal for small businesses that need the tax benefits of a retirement plan with no additional costs or administrative burden.
SIMPLE IRAs have their downsides. They are much lower than a 401k, and the penalty for early withdrawal is 25%.
Payroll Deductions IRA
Employers can set up a retirement plan by setting up a payroll deduction IRA without having to file anything with the government.
An employer can work with a financial institution in order to allow employees to automatically transfer a portion of their paycheck to an IRA. Employers can choose one or more IRA providers to receive the distributions. However, they do not have any control over the investment options.
This plan allows employees to make all contributions. The plan does not offer matching but employees can save money each year by making contributions that are tax-deductible.
An employee can encourage retirement savings by encouraging them to contribute to a payroll deduction IRA.
Profit Sharing Programs
Employers or financial institutions can set up profit sharing plans (PSPs). The employer contributes each year to the plan according to business conditions. This effectively shares profits with employees.
Employers determine how much they will contribute to the company each year.
All assets of the plan are kept in trust by a trustee, who oversees all aspects of the plan, including contributions, participation, distributions, reporting, and reporting.
Although employers have more freedom than SEP plans or SIMPLE IRAs in how they are structured, they still need to be monitored. Even if the employer shares responsibility with a financial institution, this is true.
You can also set up profit sharing plans in conjunction with other qualified retirement plans such as a 401(k). These plans are an excellent option for companies with profitable employees who want to reduce their tax burden and save money.
How do you choose the best employee retirement plan option
Once you have decided on the right employee retirement plan (or set of plans) that suits your needs and goals, it is time to choose a financial institution to assist you in making it a reality.
There are many options available to help companies set up and manage a retirement plan for employees. These include mutual funds, banks, and insurance companies.
How can you pick the best one for your coverage?
Institutions offer a basic set of retirement plans for employees, but the service levels they offer are different. They offer different levels of support and charge fees according their own rules.
These factors can have a significant impact on the tax strategy and long-term health of retirement funds.
Before we get to the best providers of employee retirement plans, let me highlight the main criteria that you can use in order to assess how it will work for you company.
Simpler employee retirement plans can be attractive as there isn’t much administrative overhead. Some plans, such as a 401(k), or profit sharing plan have many moving parts and regulations.
Once the plan has been created, there are many things that need to occur, including:
- Preparation of benefit statements, returns, or other reports as required by law
- Processing payouts (employee distributions)
- Evaluation of compliance with contribution limits, non-discrimination
- Amending plan documents
It is important to know what the employer and provider are responsible for and what they will do.
There are no fees or paperwork associated with SIMPLE IRA plans, payroll deduction and SEP. These plans will likely have low annual rates, and other fees depending on how employees invest their funds.
However, 401(k), like any other type of plan, comes with a lot of paperwork and larger sums of money. Fees can also have a significant impact on savings.
It can be difficult to understand how these fees are broken down, especially if there are multiple providers who service the plan.
Employers have the advantage of knowing that all covered service providers must disclose how they are compensated in a 408(b)(2) disclosure.
This will display how each party is receiving 401(k) payments, including:
- Fees paid directly to provider
- Indirect Compensation: Fees paid from plan investments
While direct fees are simple to identify, indirect compensation fees can prove more challenging. This could be revenue sharing, in which a financial advisor’s management fees are paid out of investments earnings instead of directly.
This means that revenue sharing will be a percentage of plan assets, rather than a dollar amount.
Employers should understand the fees on the 408 (b)(2). The government encourages providers and employers to go through all fees.
Providers can conceal fees in ways that make it difficult to find, even if they know what you want.
It is important to find a retirement plan provider that is open and honest about the fees.
After you have created a 401k, you should be vigilant about your 404(a(5) Participant Fee Disclosure. This document will list all fees your plan is subject to.
Where will all this money go? This money is not going to be parked in savings.
Your employees have different options depending on which plan they choose. They can choose where and how to invest their money. These options include:
- Bond funds
- Foreign funds
- Index funds
- Funds with large-capital and small-capital investments
- Mutual funds
- Real estate funds
These options include stable and safe investment opportunities. However, they may also include aggressive growth funds.
There are typically fewer options with simpler plans than with a traditional 401(k). You may be able offer your employees a restricted portfolio or a wide range of investment options depending on which provider you choose.
A wider variety of investment options will require more oversight, paperwork and fees.
Some brokerage windows will allow employees to direct their investment decisions.
Companies can offer more options to employees and have greater control without having to take on additional responsibility. Employees will take responsibility for their actions and make their own decisions.
This is a great option because it allows people to save differently depending on their current career.
Diversifying investments is a good practice for retirement. This will allow you to weather market shocks more easily.
It is a good thing to give employees more options, but it can come at a price. It might surprise you to see how diverse portfolios can be made from the limited options offered by Human Interest.
Look for an employee retirement plan that integrates directly with your payroll. This is seamless, direct integration. Your provider communicates directly with your payroll service. Never again do you have to make changes yourself.
You will often see no-touch or hands-free solutions. This is true only if the solution integrates with your payroll and HR services.
If you don’t, managing a 401k will require a lot more data entry and administrative tasks. If you are unable to find a payroll service that works with your plan, it is worth looking into switching to another one.
This could be a major pain, especially if your HR service or PEO is involved. But what are the implications of choosing a plan that offers less than ideal benefits? These could have a huge impact on your long-term financial health.
You might also have to hire full-time employees to handle payroll functions that could easily be automated.
A SIMPLE IRA or SEP may not need payroll integration. They don’t have as many administrative overhead.
The integration will also eliminate many steps required to process each employee’s monthly contributions. Who wouldn’t like to spend a few minutes a month making sure that the retirement fund is running smoothly?
If all goes well, your relationship with your retirement plan provider will last a lifetime. The quality of your communication and the support you receive will have a significant impact on the longevity of your relationship with retirement plan provider.
You may need to pay more for the support you require.
For example, Human Interest will offer different levels of customer support depending on which pricing tier you choose. Their plans are named Essentials, Complete, or Concierge.
Employers pay less for Essentials but must do more work on their own. Concierge comes with dedicated account management, but at a higher cost.
You can also read reviews online from customers to get an idea of the reliability of providers. You can get a better idea of what you should expect from a provider than their marketing materials, but you should still take the reviews with a grain.
#1 — Guideline — The Easiest Way To Start A 401(k).
Guideline is a 401k provider that does not charge fees for investments. They also handle all the administrative paperwork. Guideline is both affordable and easy to set up a 401k for your employees.
Employers can use it to set up traditional and Roth 401k plans with matching options or without. Employers may also be able to create profit sharing plans, which work in the same way as a bonus and make a year-end contribution towards an employee’s retirement plan.
Guideline charges a monthly base fee plus $8 per month per employee. This is how pricing works. Annual reports, government filings and custodial services are free of charge.
The pricing is predictable and fixed at a flat monthly cost, which makes it different from other options for employee retirement plans. No third-party fees or complicated revenue sharing are added to people’s savings.
Guideline’s software automates nearly every administrative task in 401(k). This is why it is so affordable.
Guideline integrates directly with eight of the most popular payroll services like ADP, Gusto QuickBooks and Square. These integrate your payroll and HR data instantly with minimal effort.
Guideline provides both employers and employees with intuitive dashboards that allow them to monitor their retirement accounts and choose from over 40 index funds.
They can also invest in managed portfolios of stocks and bonds.
Guideline is responsible for managing managed portfolios. This means that there are no options to choose individual investments. They choose the level of risk they want to take, such as conservative, moderate or aggressive, and are automatically invested in stocks, bonds, funds, and other investments that match their goals.
This eliminates the need for employees to do any extra work. Portfolios are automatically rebalanced, which means that employees can invest in a variety of risk-tolerant assets.
Guideline charges a $39 per month base fee (plus $8 per employee), which covers all administrative fees and onboarding.
Guideline Prime charges $99/month with the same per employee charge. It also includes a dedicated account manager and customizable financial and billing reports as well as additional tools for profit sharing.
Guideline is available to any company, regardless of size. You can start Guideline today and have a retirement plan for your employees in place by tomorrow.
#2 — Human Interest — Best Plan for Small and Midsize Organizations
Human Interest offers a low-cost, hands off 401(k), solution that is great for both startups and small businesses.
It is easy to use, modern and intuitive to use. They are capable of handling all administrative tasks including recordkeeping and compliance with the IRS.
This fully managed provider has a major drawback: they do not offer retirement plans or investment options. They offer only 401(k), profit sharing and 403(b plans to employees of tax-exempt and public schools.
There are more than 30.000 mutual and index funds available. However, there are no other investment options.
While larger organizations may find the lack diversity problematic, smaller companies will find Human Interest to offer a high-quality alternative for those who want a simple, stable retirement plan.
The platform’s simplicity keeps costs low and administrative overhead at a minimum.
It is a great way to automate your employee retirement plan. They can concentrate on their work, and the savings will take care. With no special attention, low-risk mutual funds and index funds can build wealth over time.
This is especially useful for those who aren’t interested in learning about financial markets. Although retirement funds are entirely managed by Human Interest, they do offer self-directed options.
There are three pricing tiers that can be purchased, each based on the amount of administrative support required.
- Essentials: $120/month base fee, plus $4/month per employee
- Complete: $150/month base fee, plus $6/month per employee
- Concierge: $150/month base fee, plus $8/month per employee
The Essentials tier is a great value for an all-in one 401(k). The cost of adding eligible employees is $4/month, which is lower than Guideline, but Human Interest’s base fee is more.
Human Interest offers a cost-effective way to recruit good workers for small and medium-sized companies. The costs of this plan will remain low as they grow, but they are predictable.
Complete, Human Interest handles a lot more administrative work, including filing and signing all IRS documents. All of this and dedicated account management are included in Concierge.
According to the company, Human Interest can be started in just fifteen minutes. Imagine the impact these fifteen minutes can make in fifteen years.
#3 — Nationwide — Best For Large Organizations
Nationwide Mutual Insurance Company, a Fortune 100 member, is one of America’s largest financial and insurance services companies.
They can offer all types of employee retirement plans I have mentioned and they can also administer other benefits such as health savings account (HSAs).
You also have a wealth of investment options available, including stocks, bonds and funds.
Employees can have a lot to say about how investments are managed. Employees can opt for a more hands-off approach, such as professional account management. This allows them to sit back and allow advisors to drive.
This account is great for employees who don’t have experience investing but should be able to understand the costs of management. These fees are usually indirect. Nationwide however prides itself on explaining all fees clearly.
Nationwide also offers additional options to give employees greater control. Employees can open a self-directed brokerage account to invest in any publicly traded mutual fund, exchange traded fund (ETF), stock, or bond.
Because of the variety of investment and plan options, I love it for large companies. Large companies need to be able offer retirement plans for employees that are suitable for all ages and abilities.
Employers can offer special benefits to top talent, as well as rank and file workers the ability to invest however they wish.
Nationwide supports auto enrollment in many ways. This can increase plan participation in a way that is beneficial for both the employer and employee.
Nationwide will provide pricing information. Nationwide already serves more than 2.5million participants and has $141 billion in retirement assets. This means that you can feel confident that your company will benefit from their services.
#4 – Vanguard — Best SIMPLE IRA
Vanguard is one the largest investment firms in the world. Vanguard offers almost every type of employee retirement plan and gives people the option of a wide range of investments.
Vanguard is a good choice for small businesses who are eligible for a SIMPLE IRA or want to set it up. This applies to self-employed people, small business owners, as well as businesses that employ less than 100 employees and don’t have a qualified retirement plan.
Vanguard does not charge a fee to open an account. The SIMPLE IRA charges a $25 annual fee, with no additional fees.
The $25 fee is waived once you have $50,000 in Vanguard funds. The annual fee is now 0.30% of total assets managed.
SIMPLE IRAs are very easy to use for administrative support. The IRS does not require reporting, but certain notifications are required for employees.
Vanguard’s reputation for excellent customer service and support is unmatched.
Vanguard’s wealth of investment options is another reason to choose Vanguard. This applies to companies who want to establish a 401k, SEP, or any other retirement plan. It is not limited to a SIMPLE IRA.
Vanguard employees may choose to invest in over 100 mutual funds. Some index funds of Vanguard have been able to provide investors with remarkably consistent returns year after year.
Everyone can save more if they start a retirement plan for their employees as soon as possible. This provides employees with a sense of security that is unmatched and helps them to see the long-term when things get tough.
Guideline and Human Interest will work for self-employed people, small business owners, as well as midsize businesses.
Guideline offers more investment options and charges a lower monthly base fee. Human interest can support 403(b), as well as 401(k) plans, and this may have a lower monthly expense per employee.
Nationwide and Vanguard offer many options for larger companies or those who want to create a new type of retirement plan other than a traditional 401(k) plan.
Because of its wide range of investment opportunities, Nationwide is my top choice for organizations. Employees can save on their terms and employers can create plans to help them get the most out of every dollar.
Vanguard can help any company save for their future. However, I wanted to highlight their SIMPLEIRA for small business owners. It is a great deal for qualified small businesses. A SIMPLE IRA with Vanguard may be the best way to save if the 401(k), is too overwhelming.
By: Neil Patel
Title: Best Employee Retirement Plans
Sourced From: neilpatel.com/blog/best-employee-retirement-plans/
Published Date: Tue, 28 Sep 2021 16:00:00 +0000