Choosing the Right Retirement Plan for Your Company

As a business owner, selecting the right retirement plan for your company is a crucial decision that requires careful consideration. Offering a retirement plan benefits your employees, provides valuable tax advantages for your business and if structured correctly, can allow you to maximize your personal retirement savings. However, with numerous options available, navigating an ever-evolving retirement plan landscape can be overwhelming. In this blog, we will explore various retirement plan options, their features, benefits, and how to choose the right plan for your business.

In general, retirement plans can be categorized into two main types:

• Defined Contribution plans, such as 401(k) plans, allow employees to “define” a portion of their salary they wish to “contribute” to their retirement account on a pre-tax or post-tax basis. An employee’s eventual retirement benefit depends on the amount of contributions made and the performance of investments selected. The Employer can also match a percentage of employee contributions, incentivizing employees to save for retirement. Matching contributions can also be tax-deductible for the employer.
• Defined Benefit plans, like Cash Balance plans, promise an employee a specific retirement benefit amount based on actuarially determined factors such as salary and years of service. The employer is the party who “defines” the contribution made to the retirement account on behalf of employees and also is responsible for the performance of investments selected. The Employee does not contribute their salary to this type of plan.

Business owners have several retirement plan options to consider, each with its own advantages and limitations. Let’s explore some of the popular choices:

1. SEP IRAs: Simplified Employee Pension (SEP) IRAs are tax-advantaged retirement plan options suitable for small businesses, including self-employed individuals. The Employer contributes a percentage of each employee’s compensation, and the contributions are tax-deductible for the employer. SEP IRAs are easy to establish and maintain, making them attractive for small business owners.
2. SIMPLE IRAs: SIMPLE IRAs are designed for small businesses with fewer than 100 employees. They offer a simplified retirement plan solution with lower administrative burdens. Employers can choose to make matching contributions or non-elective contributions, and employees can also contribute a portion of their salary. SIMPLE IRAs are cost-effective and have lower administrative burdens compared to 401(k) Plans.
3. 401(k) Plans: 401(k) plans are widely recognized and provide a flexible and customizable retirement plan option for businesses of all sizes. They allow employees to contribute a portion of their salary, and employers can choose to make matching contributions. 401(k) plans offer higher annual contribution limits and can be tailored to meet the specific needs of your business. However, they also come with higher administrative and compliance costs.
4. Safe Harbor 401(k) Plans: Safe Harbor 401(k) plans are a variation of the traditional 401(k) plan that automatically satisfy certain non-discrimination requirements. By providing required employer matching contributions or non-elective contributions, these plans avoid the need for annual compliance testing. Safe Harbor 401(k) plans are popular for business owners seeking to simplify plan administration and maximize savings to annual contribution limits.
5. Cash Balance Plans: Cash Balance plans combine elements of both defined contribution and defined benefit plans. Plan contributions are made only by the employer, and they offer the opportunity for even higher contribution limits and accelerated retirement savings. Cash Balance plans are particularly beneficial for business owners with high income who want to maximize tax-advantaged retirement savings.

Each retirement plan option comes with its own set of features, benefits, and considerations. By offering a generous retirement plan, you are encouraging your employees to save for their future and demonstrating your commitment to their wellbeing. Additionally, retirement plans are valuable tools for reducing tax liability and increasing overall savings for yourself and your business.

Tax Credits to Help Start a New Plan
The recently enacted SECURE 2.0 Legislation introduced many new incentives for small businesses, which make starting a retirement plan easier than ever. One notable provision is the expansion of tax credits for startup retirement plans. Small businesses that start a new retirement plan may be eligible for tax credits of up to $5,000 per year for the first three years, to offset administrative and startup costs.¹ This tax credit can significantly reduce the financial burden of implementing a retirement plan and allows more money to be used by the business to offset plan fees or increase contributions made to employees.

How to Choose the Right Plan
If you are a business owner who doesn’t feel confident about your current retirement plan or would like help setting up a new plan, you may benefit from working with a fiduciary retirement plan advisor. An experienced advisor can help you navigate all the complexities and provide the information you need to make a confident decision for you and your employees. At Foster Group, our process starts with an assessment of your business’s unique needs. We will guide you through the pros and cons of different retirement plan options and assist in evaluating factors such as employee demographics, budgetary constraints, plan costs, administrative requirements, and desired contribution levels.

Working with a Foster Group fiduciary advisor specializing in retirement plans can help you navigate these complexities and make informed decisions that align with your business’s goals and the financial wellbeing of your employees. Together, let’s start planning today to help ensure that you and your employees are as prepared as possible for retirement!