Now is the time of year to review your business’ retirement plan for next year. If you do not have a retirement plan, it’s time to consider starting one.
If your business does not have a retirement plan you might want to consider starting one for two reasons. The first is for hiring and retaining the best employees. Most quality workers want benefits and a retirement plan can cost as little as 2% of payroll. The second reason, it provides a way to take more money out of your business that is tax deferred.
A small business with a SEP-IRA or a Simple IRA might want to upgrade to a 401(k) plan.
Many new features are available on the 401(k) plans that make them less expensive to manage and maintain, while providing more opportunities for the business owner to put more money away for their retirement.
One recent improvement to 401(k)s over the last few years has been the Safeharbor 401(k). This is for business’s less than 10 employees where the employer can max out his contributions for retirement while only offering to match his employees. It is then up to the employee to have an interest in their own retirement. This plan is very good for professional practices with one or two highly compensated individuals.
Larger companies with a 401(k) need to consider adding some of the new options created by the Pension Protection Act of 2006. The first option is automatic enrollment for employees to increase participation and allow highly compensated individuals to fully fund their retirement account.
Option two is allowing employees to make their contributions under a Roth provision. That is the employee’s contribution is with after-tax dollars. When the employee retires than can withdrawal their contributions tax-free.
The third option is having company sponsored independent investment advice for employees. This will help with employee participation by giving them sound advice, so the two extremes do not happen; investing to aggressively or conservatively.
Companies with defined benefit plans or pension plans have other considerations. The Pension Protection Act will require employers to actually meet their actuarial requirements of their plan on a year-to-year basis. This will mean increased contributions yearly for most employers. To add to that next year accounting standards will require companies to carry pension liability on their balance sheet. Given these criteria many may opt to convert to a 401(k) plan or a hybrid defined benefit/defined contribution plan. These so-called DB(k)s provide a low employer-paid guaranteed lifetime monthly retirement benefit that can be supplemented by voluntary tax deferred contributions from employees.
