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Starting an employee retirement plan isn't too difficult or expensive, even for a small business.
In addition, these programs provide tax benefits for both employees and the company, which leaves more money in each account.
Offering such benefits is a great way to attract skilled candidates and gives your top talent a great reason to stay.
The sooner you start, the better.
First, I'll walk you through the different types of employee retirement plans available. There are more than 401 (k) plans out there to help people save for afterlife, including some types that are specifically designed for small businesses.
Then let's look at what to consider when deciding which provider to manage your employee retirement plan.
Of course there is a little bit to know, but there is a lot to be gained.
For almost everyone, retirement is the biggest expense of their life. By offering a plan to help them save, employers give a much-needed sense of security to employees thinking about their family's future.
Read on for better candidates, happier employees, and serious tax breaks every year.
The top 4 options for employee retirement plans
- Guideline – Easiest way to start a 401 (k)
- Human Interest – Best 401 (k) for small to medium-sized businesses
- Nationwide – Best for large companies
- Avant-garde – Best SIMPLE IRA
The different types of employee retirement plans
There are a number of important details that employers need to consider when choosing an appropriate type of retirement plan.
With all tax laws and government regulations, the choice will depend on the basic structure of each plan, which does not require an MBA to be understood.
Also, after you've worked with a good insurance provider, you have someone to help you fill in the knowledge gaps, predict what each plan will realize in the years to come, and guide you to a more appropriate plan if it doesn't fit right.
Let's dive in.
Qualified employee retirement plans – that is, those with tax benefits – fall into two main categories, only one of which is widely used today:
- Defined benefit plans are fully managed by employers. These are also known as pensions and pay out a fixed benefit every month. These were very popular until the 1980s, but are being discontinued due to the high maintenance costs for employers.
- Defined contribution plans are much more common today. With these plans, employees add cash from each paycheck to their retirement. Organizations can also choose to match employee contributions.
The amount that employees, the company, and the taxation of money contribute varies from plan to plan. Corporations have some flexibility in implementing each plan, but many of the ground rules and boundaries are set by the federal government.
Important note: Plans have different limits on how much employees and employers can contribute each year. These limits change regularly as the government adapts to rising cost of living. The IRS provides current limits on contribution limits for benefits for each type of retirement benefit limit and contribution that are administered by the IRS.
It's really important to understand the key rules of any plan and how people can save in the long run.
Let's go over the most common types of defined contribution plans, how they differ, and what types of companies use them. The ones I will treat are:
- 401 (k) plans
- Roth 401 (k) plans
- SEP plans
- SIMPLE IRA
- IRA wage deduction
- Profit sharing plans
There are a few types of employee retirement options that I haven't covered here, but these are the most common plans available.
401 (k) plans
A 401 (k) plan is an employer-sponsored retirement savings account. Employees pay part of their salary into the account, which may or may not be adjusted by the employer.
Contributions are pre-tax, meaning they are not taxed until the employee typically withdraws money from the 401 (k) after retirement. The amount that employees contribute also reduces their taxable income each year.
The money in a 401 (k) grows deferred for tax purposes (as in not taxed until retirement) and puts an employee's retirement plan on autopilot. A little bit of the gross of each paycheck goes straight to your nest egg every month.
Companies can choose to match employee contributions, but it doesn't have to be a 100% match. It is usually based on some formula they set. An example of a common matching formula is an employer comparing 50% of the contributions up to 6% of the salary.
Matching contributions are tax deductible so a 401 (k) can be part of a company's tax strategy, helping both employers and employees save more for the future.
It gets better.
Thanks to the new legislation in 2019, the tax credit for companies starting a 401 (k) is now up to $ 5,000 and no less than $ 500 per year for three years, plus an additional $ 500 for auto enrollment setup. The credit can be used for set-up and administration costs.
Much more paperwork is required to start a 401 (k) than any other plan. So this tax credit can help make the transition easier and get everything set up properly. Once 401 (k) plans are in place, employees can make a lot more money each year than other types of plans.
The investment options for a 401 (k) depend on the plan chosen by the company. Employees have a say in where they invest the money, although they usually choose from a limited portfolio of options.
Withdrawing funds early (before the age of 59) will result in a 10% penalty on top of the taxes owed. However, there are exceptions to this rule for workers over 55 that allow them to avoid the early withdrawal penalty. This only includes the 401 (k) of the job they are leaving, not the retirement plan at other former companies.
There are also special rules for people who have “immediate and high financial needs”. This is known as hardship distribution, and it means people can use money from their 401 (k) on things like necessary medical treatment or avoiding foreclosure and eviction without penalty.
There are two common flavors of the 401 (k) available to certain types of workers:
- 403 (b) plans: Employees of public schools, colleges, universities, churches, tax-exempt and non-profit organizations
- 457 (b) plans: State and local government employees
With the exception of a few special rules, these plans are identical to the 401 (k)
Roth 401 (k) plans
Employers can choose to sponsor a Roth 401 (k), which is virtually identical to a traditional 401 (k) except that the contributions are made after tax.
This is an important change that has both pros and cons.
Employees are unable to deduct contributions from their taxes so they do not reduce their tax burden while saving, which is a benefit of a traditional 401 (k).
On the other hand, with a Roth 401 (k), they can withdraw both their contributions and income tax-free once they retire.
Another benefit is that once the five year plan is in place, you can make withdrawals tax-free. For an early withdrawal, you would still have to pay tax on income, but not the money that you have already paid tax on.
So this is the compromise. With a Roth 401 (k), you will now pay taxes, but when you retire, all savings and income will be yours without a Uncle Sam haircut.
This could work very well for a young employee who believes they will make more money later in life. They now pay taxes on income and avoid paying it if they are in a higher class.
However, it is not best for everyone as executives may not want to pay taxes in their current range. They are probably better off paying when they retire and making the deductions now.
Some companies may offer both a Roth and a traditional 401 (k) so employees can decide how best to save for retirement.
A simplified employee pension (SEP) is a type of individual retirement account (IRA) offered by an employer.
It's much less complex to manage than a 401 (k), making it ideal for smaller businesses and the self-employed.
Only employers contribute to the SEP, and these contributions are tax deductible. The money is held in an IRA on behalf of the employee and grows with deferred taxation.
Contribution limits are much higher for a SEP than for a personal IRA, so people can set aside a lot more money than they otherwise could. There are also fewer rules on income limits that make it good for high earners.
SEP plans are nice because of their flexibility. Organizations are required to provide the same percentage to all eligible employees each year, but this percentage is subject to change.
For example, during a good year, an employer may choose to maximize contributions, while they may not contribute if the company relies on cash.
Because these plans are easier to manage and companies can afford flexible amounts each year, SEP plans are great for smaller businesses that want to grow and help their employees save at the same time.
A SIMPLE IRA is a retirement plan for companies with 100 or fewer employees that does not offer any other qualifying retirement plan such as a 401 (k).
SIMPLE stands for "Savings Incentive Match Plan for Employees" and is named accordingly because the plan requires very little administrative effort. It's really just the original plan and the annual information.
Employees can pay part of their salary to the SIMPLE IRA, and employers must either:
- Adjust employee contributions dollar for dollar up to 3% of an employee's compensation, or
- Make a fixed contribution of 2% of the remuneration for all eligible employees, regardless of whether the employees make a contribution themselves.
The low start-up costs and administrative burden make it ideal for smaller businesses that want the tax benefits of a retirement plan without the legwork of a 401 (k).
The drawbacks of a SIMPLE IRA are the contribution limits – which are below 401 (k) – and the 25% early withdrawal penalties are high for the first two years.
IRA wage deduction
An IRA wage deduction allows companies to set up an employee retirement plan without filing anything to the government.
Employers are working with a financial institution so employees can automatically redirect part of their paychecks to an IRA. The employer can designate one or more IRA providers to receive distributions, but they have no say in investment options.
In this plan, the employees make all contributions. There is no matching, but the contributions are tax deductible, which can help employees save each year.
An IRA wage deduction is an inexpensive, risk-free way for a company to encourage employees to save for retirement.
Profit sharing plans
Profit sharing plans (PSPs) can be created by employers or with the help of a financial institution. The employer contributes to the plan each year based on the terms and conditions and effectively shares the profits with employees.
Employers decide how much, if at all, they want to contribute each year.
All of the plan's assets are held in a trust that is overseen by a trustee who ensures the integrity of the contributions, participants, distributions and reporting.
Employers have a great deal of freedom over the structure of these plans, but they require more control than a SEP plan or SIMPLE IRA. This also applies if an employer shares responsibility with a financial institution.
Profit-sharing plans can be set up in addition to other qualifying employee retirement plans such as a 401 (k). They are a great option for profitable companies looking to help their employees save more and reduce their current tax burden.
How to choose the best employee retirement option
Once you know which employee retirement plan – or which plans – make sense for your goals and resources, it is time to choose a financial institution to help you implement it.
Banks, mutual funds, and insurance companies are all suitable options for companies to set up and manage an employee retirement plan.
How do you choose the right provider?
While the institutions offer the same basic employee retirement plans, the services they provide are by no means identical. They have different levels of support, charge fees according to their own rules, and offer different types of investments.
All of these factors can have a huge impact on a pension fund's tax strategy and health over time.
Before we look at the top employee retirement plan providers, let me highlight the key criteria that you can use to evaluate how this works for your company.
Some of the simpler employee retirement plans are attractive because they don't involve a lot of administrative work. Other plans, such as a 401 (k) or profit sharing plan, have many moving parts and legal requirements.
After the plan is created, several things need to happen, including:
- Creation of legally required performance records, returns and reports
- Assign contributions
- Process distributions (employee payouts)
- Assessment of compliance with contribution limits and non-discrimination
- Change plan documents
When looking for different plans, it is important to understand what the employer is responsible for, what the provider will do, and how much all of these will cost.
With wage deduction, SEP and SIMPLE IRA plans, there aren't many administrative papers or fees involved. These plans are likely to have low annual rates and then different fees depending on how the employees invest their money.
On the other hand, with any type of 401 (k) plan, there is a lot more paperwork, larger sums of money, and fees that can really affect people's savings over time.
How these fees break down can be incredibly complex, especially when multiple providers serve the plan.
Fortunately for employers, all insured service providers are required by law to explain how they will be compensated in a 408 (b) (2) disclosure.
This shows how each party is paid off the 401 (k), including:
- Direct compensation: Fees paid directly to the provider
- Indirect compensation: Fees from planned investments
Direct fees are easy to identify, but indirect compensation fees can be more difficult to determine. This could include revenue sharing where a financial advisor's management fee is paid out of investment income rather than directly.
This means that revenue sharing is shown as a percentage of plan assets rather than a hard dollar amount.
These fees should be explained in 408 (b) (2) in order for employers to make an informed decision, and the government encourages providers to guide employers through all fees.
Ultimately, however, providers can hide fees in ways that are very difficult to determine, even if you know what to look for.
This is why it is so valuable to find a retirement plan provider who is transparent and open about fees.
Once you have a 401 (k) set up, you should disclose your 404 (a) (5) attendance fees. This shows all of the charges your plan is facing.
Where does all the money go? It's not just parked in a savings account.
Depending on which plan you choose, your employees have different options as to where and how their money is invested. Typically these include:
- Pension funds
- Foreign funds
- Index funds,
- Large-cap and small-cap funds
- Investment funds
- Real estate funds
These options tend to involve relatively safe and stable investment opportunities, but can also include more aggressive growth funds.
With simpler plans, there are usually fewer options than with a 401 (k). Depending on which provider you choose, you may be able to offer your employees a limited portfolio of choices or a wide range of investment options.
In general, a wider range of investment options require more supervision, paperwork, and fees.
Some offer broker windows with which the employees can control the investment of their pension funds themselves.
This enables companies to offer their employees a wider range of options and control without the need for additional responsibilities. Employees make their own decisions and take their own risks.
This can be very attractive as people may want to save differently depending on where they are in their careers.
It is a healthy practice to diversify types of retirement investments in order to more easily withstand shocks to individual areas of the market.
Giving employees more choice is good, but comes at a cost. You will be surprised how diverse a portfolio can be from the relatively narrow options in a plan like Human Interest.
Integration of payroll
Find an employee retirement plan that's built into your payroll. I'm talking about seamless, direct integration where your provider communicates directly with your payroll service. You never have to update the information yourself.
In most cases, you will see hands-free or non-contact solutions. This only applies if it's built right into your payroll or HR services.
If not, there will be many data entry and management tasks associated with managing a 401 (k). It's worth seriously thinking about switching to a different payroll service if you can't find anything built into a plan you want.
It could be a huge pain, especially if you work with an HR service or PEO, but what are the consequences of choosing a plan with less than ideal benefits? They could be massive in the long run.
You may also need to employ full-time staff to manage the automated billing functions.
A lack of payroll integration may be fine for a SEP or SIMPLE IRA because they don't have as much administrative burden.
At the same time, the integration would eliminate dozens of steps in processing monthly posts for each employee. What small business owner wouldn't want to save a few hours a month to make sure the pension fund is in order?
If all goes well, the relationship between your company and the retirement plan provider will be long. Over the years, the quality of communication and support you receive will have a huge impact.
Note that you may have to pay extra for the type of assistance you want.
For example, Human Interest offers different levels of customer service depending on the price level. It's no coincidence that their different plans are called Essentials, Complete, and Concierge.
With Essentials, employers pay less, but have to do more themselves. The Concierge, on the other hand, offers dedicated account management at a higher price.
You can also read reviews from current customers online to get a feel for how reliable providers are. This can give you a more authentic picture of what to expect than a vendor's marketing material. However, you should give reviews with a grain of salt.
# 1 – Guideline – Easiest Way to Start a 401 (k)
Guideline is a 401 (k) provider that does not charge any investment fees and handles all administrative paperwork. This makes Guideline both one of the cheapest and one of the easiest ways to start a 401 (k) for your employees.
It can help employers set up both traditional and Roth 401 (k) plans, with or without appropriate options. Employers can also create profit-sharing plans that act as a year-end bonus to an employee's 401 (k).
The pricing works so that Guideline charges a base fee per month plus $ 8 / month per employee. There are no additional charges for annual reports, government records, or custody services.
This flat monthly fee makes pricing predictable, which is significantly different from most other employee retirement options. There are no complicated revenue sharing or third-party fees that impact people's savings.
The reason Guideline is so inexpensive is because they have developed software that automates almost any 401 (k) administrative task.
Guideline integrates directly with eight of the best payroll services such as ADP, Gusto QuickBooks, and Square. These synchronize your salary and personnel data in real time without you having to work on it.
The policy also provides intuitive dashboards for employers and employees so that they can monitor their retirement accounts and choose from more than 40 index funds to invest their money in.
Alternatively, they can invest in a managed portfolio of stocks and bonds.
Managed portfolios are fully monitored by Guideline, so there is not much freedom in choosing individual investments. They simply choose the level of risk – such as conservative, moderate, or very aggressive – and are automatically invested in a range of stocks, bonds, and funds that achieve their goals.
This eliminates the work of the employees. Portfolios are automatically rebalanced, ensuring that employees are always investing in a diverse, risk tolerant set of assets.
For Guideline, the base fee is $ 39 / month (plus the above $ 8 / month per employee), including all administration fees, live customer support, and employee onboarding.
Guideline Prime has a base fee of $ 99 / month for the same fee per employee, and has a dedicated account manager, customizable financial and billing reports, and additional tools for profit sharing plans.
Any company of any size can start with Guideline today and set up an employee retirement plan tomorrow.
# 2 – Human Interest – Best 401 (k) for small to medium-sized businesses
Human Interest offers an affordable 401 (k) solution that is great for startups and SMBs.
The user interface is modern, easy to navigate, and effortless to set up. They can handle all administrative tasks, including record keeping and IRS compliance, and have 50+ payroll integrations.
The biggest compromise with this fully managed provider is the lack of investment options and retirement plans. They only offer 401 (k) plans, with-profits plans, and 403 (b) plans for public school and tax-exempt organizations.
There are over 30,000 mutual and index funds to choose from, but no other types of investment options.
Larger companies may find the lack of diversity a problem, but companies just looking to set up a stable, no-frills retirement plan will see human interest as a quality option.
The simplicity of the platform keeps costs down and administration to a minimum.
I recommend it for people looking to put their employee retirement plan on autopilot. You can focus on the work and the savings will take care of itself in the long run. Index funds and low risk mutual funds will build wealth over time without needing special attention.
It is especially effective for people who don't want to learn about financial markets. Pension funds are fully managed by Human Interest, but provide self-directed options.
There are three different pricing tiers available based on the level of administrative support:
- Basics: $ 120 / month base fee plus $ 4 / month per employee
- Complete: $ 150 / month base fee plus $ 6 / month per employee
- Doorman: $ 150 / month base fee plus $ 8 / month per employee
The Essentials tier offers a phenomenal price for an all-in-one 401 (k) solution. Adding eligible employees at $ 4 / month is less than the guideline, although Human Interest's basic monthly fee is higher.
For small and medium-sized businesses looking to grow, Human Interest offers an affordable plan to attract a good workforce. As you scale this plan, costs remain low and predictable.
With Complete, Human Interest takes on a lot more administrative work, including signing and filing all of your IRS documents. The concierge offers all of this as well as dedicated account management.
You can get started with human interest in fifteen minutes, the company says. Think of the difference that fifteen minutes fifteen years later could make.
# 3 – Nationwide – Best for large companies
Nationwide Mutual Insurance Company is one of the largest insurance and financial services groups in the United States and a member of the Fortune 100.
They offer all kinds of employee retirement plans that I talked about, and they can manage other types of benefits too, such as: B. Health Insurance Accounts (HSAs).
They also offer a rich selection of investment options, including a wide range of funds, bonds, and stocks.
Employees have a lot of influence on how their investments are handled. You can take a hands-off approach – like professional account management – where employees just sit back and let the advisors drive.
These accounts are good for employees who are not seasoned investors, although they should understand how much they are paying for management. Most of these fees will be indirect, but Nationwide takes pride in making all plan fees as clear as possible.
Nationwide offers other options that give employees more control. At the practical end of the spectrum, employees can open a self-directed brokerage account and invest in virtually any publicly traded mutual fund, exchange traded fund (ETF), bond, or stock.
I like it for large companies because of the wide range of planning and investment opportunities. Large organizations need to be able to offer retirement plans for employees of all ages and abilities.
Ordinary employees are free to invest as they see fit, and employers can create special benefit packages for top talent.
Nationwide also supports several types of automatic registration. This can help increase plan participation in a way that makes sense for both the employee and the employer.
You must contact Nationwide for pricing. With more than 2.5 million subscribers and $ 141 billion in retirement savings, you can be sure they are helping your business grow their savings too.
# 4 – Vanguard – Best SIMPLE IRA
Vanguard is one of the world's largest investment companies. They offer virtually every type of employee retirement plan and offer people a wide range of investments.
I recommend Vanguard for companies that qualify for a SIMPLE IRA and want to set one up. This includes the self-employed, small business owners, and businesses of fewer than 100 people who do not have another qualified retirement plan.
Vanguard does not charge you any fees for setting up an account. There is an annual fee of $ 25 for each SIMPLE IRA fund, with no additional charges.
Once you have qualifying assets of $ 50,000 in your Vanguard fund, there is no fee of $ 25. The annual fee then shifts to 0.30% of the total assets under management.
When it comes to administrative support, there's not much to worry about with a SIMPLE IRA. There are no reporting requirements for the IRS, although certain employee notifications are required.
In the event things go wrong, Vanguard has a great reputation for customer service and investor support.
Another reason to choose Vanguard is the abundance of investment opportunities. This applies to companies looking to set up a 401 (k), SEP, or other retirement plan, not just a SIMPLE IRA.
Employees using Vanguard for retirement can invest in more than 100 different mutual funds. This includes some of Vanguard's index funds that have produced incredibly consistent returns for investors year after year.
The sooner you start a retirement plan, the sooner everyone can start saving. It offers employees an incomparable feeling of security and helps them to keep a long-term perspective when everyday life becomes difficult.
Both Guideline and Human Interest will work for the self-employed, small businesses and medium-sized companies.
The policy offers more diverse investment options and a lower monthly fee. Human Interest, in addition to 401 (k) 403 (b) plans, can support and can result in lower monthly costs per employee.
For larger organizations or smaller organizations looking to start a type of retirement plan other than 401 (k), Nationwide and Vanguard have a wide range of options.
Nationwide is my first choice for companies as there are a variety of investment opportunities. Individual employees save on their own terms, and employers can create plans that help them get the most out of every dollar.
While Vanguard has the resources to help any business save for the future, I wanted to give their SIMPLE IRA a call because it's such good business for qualified small businesses. If the 401 (k) is too daunting, a SIMPLE IRA with Vanguard is just the plan to start saving.