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Helping employees save money for their golden years is an admirable effort. But that’s not the only reason to consider offering different types of retirement plans. These days any extra financial benefits aside from salaries are expected by most employees.
Serious employers must have several employer retirement plan options when presenting job offers.
Of course, workers should have flexibility and be able to choose retirement plan options that benefit their lifestyle, projected earnings, and ability to save.
For that reason, it’s essential to know about the various plans employers can offer on a tax-advantaged basis as part of a competitive employee benefit package.
Before offering a specific retirement plan, it’s important to know how it works. First, an employer-sponsored plan can vary a lot in terms of features, benefits, and contribution percentages.
Some plans involve joint contributions from the employer and employee, while others are only supported by the employee.
In many joint contributions, employers match the amount employees set aside for retirement.
However, this can be costly in some situations. That’s why employers often commit to making contributions at a specific percentage. For example, a 3% contribution is not at all uncommon in many industries.
But what happens if an employee decides to set aside even more of their paycheck for retirement, say 5% or 6%? In that case, the employer is unlikely to match the entire contribution but still match the amount adding up to 3%, which is still helpful for the employee.
Granted, contributions, maximum allowed savings, and taxation will differ depending on the specific type of plan.
The 401(k) plan is arguably the most popular of all employee retirement plans. Here’s what makes it an attractive option.
It’s the least expensive for employers. The highest cost for any retirement plan, as far as employers are concerned, comes from contributions.
In a 401(k) plan, however, employees are responsible for most of the contribution. This is usually done via salary reductions, meaning diverting a percentage of the salary directly into the plan instead of getting it in cash at the end of each month.
Salary deferrals are a great way to reduce the overall income tax because they aren’t subject to tax until taken out of the 401(k) plan.
Furthermore, the contributions made to a 401(k) retirement plan are flexible. Employees can choose to divert more or less depending on their financial situation and needs.
It’s also possible to have more control over the investment decisions to ensure employees get the best return on their money. Although it’s prudent to leave the money untouched until retiring, 401(k) funds can be accessed with limited or no penalties through hardship withdrawals or via loans, in special circumstances.
Both 403(b) and 457 plans are similar to 401(k)s. For example, both plans enable employees to defer part of their salary to their savings accounts.
But they aren’t always held to the same standards, nor can they be offered to every employee.
The 403(b) retirement plan only applies to public school employees and various organizations with tax-exempt status.
A 457 plan isn’t considered qualified. Therefore, it has different reporting guidelines and contribution restrictions. To some, it may be a better option than a 401(k).
Yet only government employees and non-profit organization employees can receive the 457 plan option from their employers.
An IRA is considered a retirement plan but not a qualified plan. This small distinction means that employees can set up their own IRA plans and don’t need the employer to do it for them.
However, certain types of IRA plans are intended for businesses and must be offered by the employer.
One reason to consider these plans is for tax deduction because they allow more significant reductions than standard IRA plans.
When talking about IRA retirement plan options, a simplified employee pension plan, or SEP, is one of the easiest savings vehicles to manage.
The SEP enables employers to make tax-favored contributions to an IRA. Not only that, but SEPs don’t require detailed reporting and don’t have complex disclosure requirements.
Simple IRA plans could be more favorable in some situations since they allow contributions from both employers and employees.
Employers are also allowed to set up simple IRA plans that work on salary reduction contributions, similar to a 401(k) plan.
Due to their mechanics and regulations, SEPs tend to be favored by small business owners or self-employed individuals for tax savings purposes.
A cash balance plan is part of the employee retirement plans usually offered to older employees.
Employers generally make set contributions based on a percentage of the employee’s annual salary. But while this may seem similar to a 401(k), it’s quite different.
A 401(k) plan only lets employees save a maximum of $67,500 as of 2022. This includes whatever amount the employer adds to the plan.
In contrast, cash balance pension plans have a limit of $200,000 per year for employees aged 60 or above. Of the many different retirement plan options, this one has the highest savings potential, especially for someone who hasn’t been able to save a lot of money over the years.
Furthermore, the savings are calculated pre-tax, meaning the billable tax income can be lowered considerably.
Giving employees stock in the company they work for is another way to help someone save for retirement. ESOP benefit plans have been linked to high productivity and better retention rates, which particularly benefits companies with a solid performance on the stock market.
An ESOP is one of the most different retirement plan options because it can also serve as the owner’s exit strategy or a financing tool.
Typically, employers create an ESOP trust. Contributions made to the trust can be used to buy company shares at a fair market value. Those shares get distributed based on the relative pay of each employee.
If the company is listed, employees can hold on to their shares after they leave the company, sell them back to the company, or sell them to other investors.
This gives employees added incentive to ensure the company meets its financial goals. The more successful the company, the more the shares go up in value, and the higher the return on the employee’s retirement plan.
That said, setting up ESOP plans isn’t always a good fit for the company or its employees. First, it’s worth considering the company’s profitability. Without proven stability or continuous growth, issuing new shares or selling shares to employees at market value might not be a good idea.
Secondly, avoiding doing this in a company with a high debt to equity ratio is important. Lastly, all company owners must be willing to dilute their own shares when offering this type of plan.
The setup is also more complex than creating other retirement plan options.
Usually, companies must conduct feasibility studies, get complex business valuations, figure out their funding options, and create a smooth process for contributions and share distribution. It can be a massive administrative and financial undertaking.
But companies like Adobe, WinCo Foods, Publix Super Markets, Amsted Industries, and others have successfully implemented ESOPs as retirement plans and employee benefit packages to stimulate growth, and productivity, improve retention and create succession strategies.
A profit-sharing plan, or PSP, is another alternative way to reward employees and help them sustain their desired lifestyle come retirement.
A PSP involves using a retirement account in which employers can contribute performance-based financial rewards. Unlike other different types of retirement plans, PSPs usually only receive quarterly or annual contributions.
These are similar to SEPs, meaning that only employers can add money to the account.
What’s interesting about SEPs is that they can be offered as additional retirement planning support along with other retirement plans.
Furthermore, there are various PSP regulations in place to prevent discrimination against employees with low wages.
Similar to setting up ESOPs, creating a PSP requires extra attention to detail and the right set of circumstances to avoid putting unnecessary financial strain on a company or under-rewarding employees.
There are three main advantages to offering different types of retirement plans to your employees. In one way or another, these benefits revolve around employee satisfaction.
Many employees these days are aware of the dangers of not having a good retirement plan. Therefore, they expect employers to offer something more than just financial compensation in the form of a good wage.
Offering retirement plan options is a great way to meet these expectations. When these plans include matching contributions, satisfaction is greatly increased because it’s perceived as adding more value to the workplace.
Some employer retirement plan options come with vesting schedules. This is a fancy way of saying that employees must stick around longer if they want to reap the full benefits of matched contributions.
It’s a reliable tactic to ensure employees don’t join your company for a few months of matching contributions only to take off with the money and leave you hanging.
It’s easy and common for companies to introduce five-year vesting schedules. For example, a five-year vesting schedule would mean that employees unlock an additional 20% of the total matching contributions.
They would have to stay with the company for that period to get 100% of the company-contributed money. Leaving after two years would still entitle employees to the full amount they contributed, but just 40% of whatever the employer added to the account.
This is a benefit with multiple positive outcomes. The employer won’t get stiffed with too many contributions if someone leaves early.
If employees stay the full five years, they might be incentivized to stay even longer. Of course, having a low turnover rate is a great cost-management tool.
After all, it costs money to find and train new employees, and it can even slow down productivity.
For a long time, Americans have been able to live paycheck to paycheck. They’ve adapted to various circumstances.
But many admit to not being prepared enough for retirement. Yearly inflation is already bad enough, so adding inflation spikes and the possibility of recessions into the mix makes future planning even more critical.
GlassDoor, one of the leading surveyor companies on workplace-related issues, showed in 2017 that many people would’ve gladly turned down wage increases if they could opt for retirement benefits instead.
That was before the economy went through some serious hardships one after another.
That’s why today, having different retirement plan options can be an amazing incentive for convincing someone to work for you.
Even if it’s not the best plan, something is better than nothing. It shows that the company is invested in helping its employees.
Different types of retirement plans have different tax advantages. But while the tax savings potential is minimal for employers, it can be maximal for employees.
Deferring salary percentages and getting “free money” contributions monthly helps employees save a lot of money. All of this happens pre-tax. Therefore, the money that goes into the savings account isn’t taxed.
Furthermore, supplementing the account monthly allows for an accelerated compounded growth rate.
Naturally, employees will eventually retire and take out the money. That’s when the government can tax it. But because retirees fall into a lower tax bracket, they end up paying less than they would have without putting it into a retirement savings account.
No matter how you look at it, it’s a win-win for everyone. And the beauty of the system is the wide range of plans available. Even companies that struggle financially and can’t make contributions can present employees with advantageous retirement plans.
Whether you’re self-employed, a small business owner, or at the helm of a large corporation, familiarizing yourself with retirement plan options is essential. There are enough plans available and plenty of room to personalize them to cater to a wide range of needs and goals.
If you want to know more about what you can offer and the best way to set up a plan, offer insurance, or provide other employee benefits, don’t hesitate to reach out.
Todd Taylor, oversees most of the marketing and client administration for the agency with help of an incredible team.
Todd is a seasoned benefits insurance broker with over 35 years of industry experience. As the Founder and CEO of Taylor Benefits Insurance Agency, Inc., He provides strategic consultations and high-quality support to ensure his clients’ competitive position in the market.
Todd Taylor with Taylor Benefits gives our small business the kind of personal service we need. Insurance benefits are important to our employees and Todd helps us find a balance between benefits and value. Todd responds immediately to my phone calls & e-mails. He has even gotten in touch with me on a Sunday when we were in need of coverage answers immediately. We are very pleased with the hands-on service Todd and his staff provide.”
-Ken and Linda Orvick, Orvick Management Group, Inc.
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