In the modern workplace, retirement benefits are a must. An Aflac survey found that 75% of employees expect their company to provide a 401(k) or other pension plan as part of their benefits package — and yet, just 53% of companies with fewer than 100 employees offer this option, according to the Bureau of Labor Statistics.
Many small business owners are hesitant to offer retirement plans because the research and implementation can be complicated and time-consuming. However, offering some kind of retirement option for employees helps attract the best candidates.
Types of retirement plans
There are many resources for small businesses looking to set up a retirement plan for their employees. The first step in finding the right type of plan for your business is understanding the different retirement plan options available to you. There are two primary structures your plan can follow: defined benefit plans and defined contribution plans.
- Defined benefit plans. These plans offer employees a defined monthly or yearly amount during retirement. You can, for example, set up a plan where an employee receives $100 per month during retirement. Companies will typically set up arrangements where employees receive a certain percentage of their former salary per year.
- Defined contribution plans. Unlike the defined benefit plans, defined contribution plans don’t have a specified monthly or yearly amount for employees to receive. Instead, both the employee and the employer can contribute to these types of plans. Money is usually invested on behalf of the employee, and the employee will receive access to the funds in retirement.
Some popular retirement plan options that fall under these two categories include:
- Simplified Employee Pension (SEP):In this plan, workers make tax-favorable contributions to an overall retirement account.
- Profit sharing plan: Some companies offer profit sharing plans, where company profits and other money are allocated to employee retirement accounts.
- Employee Stock Ownership Plan (ESOP): These plans include retirement contributions in the form of company stock options.
- 401(k): A 401(k) plan is an employee investment plan where a portion of each employee’s salary is held back and invested in an individual investment plan. Many companies will match employee contributions as part of the arrangement.
- Cash balance plan: In this plan, employees receive their contribution in the form of an account balance: both pay credit and interest credit. This agreement protects employee money from investment fluctuations.
[Read: Understanding Employee Retirement Plan Options]
Make sure you explore all your options before going out on your own to set up your business’s retirement plan.
Sponsoring a retirement plan
Once you understand the different types of plans for your business, it’s important to take the proper steps to set it up. Below are the four main stages of implementing a retirement plan, according to the IRS:
- Choosing. In this stage, you'll review the different plan options and determine what is ideal for your business. You'll want to research your options carefully and select a plan that makes the most sense from a tax perspective, both for you as an employer and for your employees.
- Establishing. Once you’ve chosen a plan, it’s time to implement it. You'll need to create a written plan, arrange fund transfers, notify your employees of their options and develop a recordkeeping system to keep track of everything.
- Operating. Actual plan operation requires following best practices to keep employee money growing while staying compliant with your plan's terms. In this step, you’ll make contributions, stay up-to-date on retirement plan laws, manage plan assets and distribute benefits.
- Terminating. An important part of a good retirement plan is constantly auditing and adjusting where necessary. If your plan is no longer working for your employees and business, choose and implement a new one.
[Read: Tailor-Made Benefits: Keeping Employees Happy Means Customizing Benefits]
Getting started
Finding the right retirement plan can be a challenge. Make sure you explore all your options before going out on your own to set up your business’s retirement plan. Many third-party companies can work directly with you to set up a plan that’s best for you and your company.
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