Group Benefits: Employer-Sponsored Retirement Solutions

A good retirement plan is becoming an essential part of drawing the interest of top professionals, but it’s important to understand how each one may affect your business. Some options that might make sense for a larger company may not be appropriate for a small business.

In the sections below, we’ll explain the basics of some of the more popular group retirement solutions, as well as some of the benefits and drawbacks of each. Each of the options below falls under the umbrella of qualified packages, which are those that are covered under section 401 of the Tax Code.

If you have any general questions about group retirement options, this resource from the IRS provides a good explanation of the different types of packages.

There are two major categories of retirement packages: defined benefit packages and defined contribution programs. In this article, we’ll explain how each works and what types of retirement benefits fall under which category. Put simply, a defined benefit program guarantees a set amount to be paid out, as with a pension. A defined contribution program does not have a set amount that is paid out at retirement but offers a more standard investment vehicle such as a 401(k) or IRA.

Defined Benefit Plans (Pension) – Defined benefit programs are pretty uncommon in most industries since employers have transitioned to defined contribution retirement packages. The way a defined benefit plan works is that the employee receives a set amount on a monthly basis during retirement. This amount is generally a percentage of the employee’s full-time pay, and the exact percentage is typically contingent on the number of years worked.

401(k) Plans (Defined Contribution) – A defined contribution plan may include any number of different investment options, depending on the type of business you operate. As pension programs have become rarer, 401(k) and other types of defined contribution packages have become the standard for employee retirement solutions. Employees appreciate 401(k) plans because of the significant tax savings and the ability for their investments to grow on a pretax basis. For businesses, offering a defined contribution benefit is a great way to reduce payroll taxes and provide employees more choice in their investment options.

IRA’s & SIMPLE Plans – An IRA, or Individual Retirement Account, operates similarly to a 401(k) in terms of tax incentives and growth of investments, but unlike a 401(k), it is not limited to employees. An IRA can be a good benefit to offer if your company is a startup or smaller company that doesn’t yet offer a traditional retirement savings program. The downside, from the perspective of an employee, is that the annual limit for investing through an IRA is much lower than it is for a 401(k). Under a SIMPLE IRA Plan, employers can contribute to employee investments as they would in a 401(k).