How to Pick a Retirement Plan for Your Small Business
By: Brandon Clark, CPA
These days setting-up a retirement plan can be done quickly, easily and with little to no money from your pocket as the business owner. So there! There’s no excuse for why your business shouldn’t offer one. After all, it’s the right thing to do for your employees (and yourself), and some states (including Maryland) have even instituted requirements for some small businesses to offer employees a retirement plan.
Here are the important things you should consider as a business owner and employer when selecting a plan. To make sure the relevant information is easily accessible we include a chart with the essential details you will need to decide the right plan for your business.
Costs are likely the first detail that are on your mind. Small businesses can find retirement options that are free. Often (depending on the investment institution you work with) a Simple IRA and SEP IRA account can be implemented for free. Its important to be more specific however, because there are a few different categories or costs applicable to retirement plans. Here are a few of the costs you will face and should consider when evaluating the best plan for your business.
Setup and maintenance costs: Employer costs for the initial set-up of the plan and monthly or annual fees for accounts, administration, IRS annual filing, and record keeping. These costs can be $0 for Simple IRAs and anywhere from $0-$1,000s of dollars for 401ks
Investment fees: These are the fees paid for investments (usually mutual funds) and are generally paid by employees through the funds they choose to be invested in. While the employer should do their best to find lower cost investment options for employees, this is not a cost the employer will have to bear.
Employer contributions to employee accounts: Employer contributions are generally the most expensive potential cost for employers, but employers have a good deal of discretion for how much they decide to offer as a contribution to employee accounts. 401k plans offer the employee the ability to not make any contribution to employee accounts. Simple IRA plans require either a match of 3% or a 2% automatic contribution (safe-harbor). Eligibility criteria and vesting (explained below) are ways to control employer contributions and ensure that only employees with longer tenures receive contributions.
One important note for all plans is that all employer contribution percentages must be the same for owners as for any employees. I.e. if the owner would like a 5% of salary match to their account. All employees must also receive a match to their accounts.
Employee Eligibility: Employers can limit participation to employees who’ve been at the company for a specified period of time to avoid administrative and contribution costs for employees that don’t make it past a trial period. This eligibility period differs by plan.
Vesting of employer contributions: Employers may institute a vesting schedule for employer contributions to 401k and profit sharing plans. Vesting can act as an employee retention tool, as it allows employees to earn employer contributions over a specified period of time (usually years). Vesting is not an option for Simple and SEP IRAs. All contributions to these plans are fully vested immediately.