While a robust retirement plan is seen as an attractive perk by many employees, as a company it can play a significant factor in maintaining the long term performance of your workforce and ultimately the viability of your business.
It's important to consider your business retirement plan options and work towards making them available to all your full-time employees. Having a good plan in place allows older employees to enjoy a dignified retirement, which also enables junior workers to be promoted or hired to replace them. You also stand to make significant savings in the form of lower healthcare plan costs, reduced wages (juniors that have been promoted do not need to be paid the same as experienced seniors, even if they both hold the same position), and increased productivity resulting from a younger and more energetic workforce brimming with new ideas about how to take your organization forward.
What Is Preventing Senior Employees from Retiring?
It is estimated that the average American needs 70%-90% of their pre-retirement income to maintain the same standards of living post-retirement. This is why a lot of employees look at the benefits any job offers. As a small business owner, there are many benefits and struggles that come along with offering retirement options.
Up to a limit, some employers match their employees’ 401(k) contributions.
For instance, if an employer is willing to match up to 4% of an employee’s salary, and the employee makes $50,000 a year, they’re contributing $2,000 would be matched by another $2,000 by the employer, meaning there is now $4,000 in the employee’s 401(k).
If the employee contributes only $1,000, the employer would match it with only $1,000; if he contributes $3,000, the employer contributes only $2,000 as that remains the 4% maximum.
This looks attractive, but it’s often not easy for employers to follow through with a high matched rate, especially if they are small businesses. At the same time, not having retirement plans means your older employees, who should have ideally retired by now, still linger on as they have not built their retirement funds up to the point that they are comfortable with giving up their jobs. This prevents young talent from being promoted or blocks the entry of fresh talent altogether.
Give Them an Out
In many cases, it makes sense to provide business retirement plan options to your employees, so that senior employees can retire, junior workers can be hired and you make savings in the form of fewer healthcare plan costs, reduced wages (juniors that have been promoted do not need to be paid the same as experienced seniors, even if they both hold the same position) and increased productivity resulting from a younger and more energetic workforce brimming with ideas about how to take your organization forward.
Can you afford to match 401(k) contributions?
This is something you need to sit down and work out. After all, no one knows your finances like you do. If you don’t offer employer contributions that meet the prevailing industry practices, potential new hires may not feel compelled to come on board, and existing employees may not be in a position to retire despite their age. This effectively defeats the purpose of having a retirement plan in place for your employees.
There are also alternate retirement options for small business owners, such as Individual Retirement Accounts or IRAs.
SEP stands for Simplified Employee Pension. All contributions are made by the employer, and the employee is not allowed to contribute. This saves you from having to match employee contributions and you can contribute as much as 25% of employee’s annual pay, subject to a maximum of $53,000 for 2016. There are no setup or maintenance costs, and an employee who chooses to withdraw the amount before he/she attains the age of 59½ years may be hit with a 10% penalty. Withdrawals are also subject to federal income taxes, making employees less likely to take out their money before they retire.
Scenario 1: Let’s say you have six employees, all of whom make $50,000 a year. You could match 4% of their annual pay into their 401(k) contributions, which works out to up to $2,000 each or $12,000 in total. What each employee has in their 401(k) at the end (if they contribute) of the year is $4,000.
Scenario 2: With a SEP IRA, you contribute $2,000 for each employee. That means you spend $12,000 in all, the same as in the above case. The difference here is that each employee’s SEP IRA has only $2000. This should theoretically be a disadvantage, but it is negated by the fact that ‘traditional contributions’ are allowed. So each employee could contribute more than $2000 of his/her own money to make his/her retirement kitty larger than with the earlier scenario. This is a boon to older employees because they are more likely to be thinking about how much money they have to retire on, and their decision to retire would be based on this.
There is no Form 5500 reporting with a SEP IRA.
SIMPLE is an acronym for Savings Incentive Match Plan for Employees. It requires employers to match employee contributions to the IRA, but both employer and employee contributions are capped at $12,500 each.
It costs just $25 per employee or $350 per plan, and requires no Form 5500 filing, unlike with the 401(k).
You don’t have to worry about breaking the bank because the employer contribution has a ceiling of 3%. This way, when compared to a SEP IRA, the maximum you spend by way of matching contributions (six employees, all of whom who make $50,000 each) is $1,500 per employee, or $9,000 in total. Let us say an employee decides to contribute $2,000 into his/her SIMPLE IRA. As an employer, you match the first $1,500, so the employee’s SIMPLE IRA has $3,500 at the end of the day.
So how is this better?
In a five-year cycle, the matching amount can be as little as 1% for two years, instead of the 3%. The 2% saved could potentially mean thousands of dollars that could go into your own retirement account, or you could kick this back into your business, so that you have more operating capital.
There is no perfect retirement plan because every business is different. You need to figure out what would be in the best interests of your employees as well as yourself before you finalize a retirement plan.