Planning for Tomorrow

Retirement benefits can help your employees and your business.

Planning for Tomorrow

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Your business stands on a solid footing. Your employees are loyal, skilled and hardworking. You pay them competitive wages and offer a health plan so they get medical care when they need it and get back to work as soon as possible.

It’s time to consider another benefit: a retirement plan.

A major investment house recently warned that people need at least eight times their annual salary set aside in savings to pay their expenses at retirement. Many won’t have it. That’s where you as an employer could help, and benefit your business in the process.

For guidance on this topic, I spoke recently with Kathryn Helmke, who follows employment law and benefits matters for Trusight in Plymouth, Minn. Trusight is now a part of MRA, an employers’ association based in Waukesha, Wis., serving member companies in several states.

As always, nothing you read here can substitute for the professional advice you will get from your financial and legal advisors. Consult them before making any decisions that can affect your company.


Why Bother?

The first question is, why offer a retirement plan at all?

For the very smallest companies, the cost of record-keeping and administrative fees might not make it worth it. And if your competitors uniformly don’t offer retirement plans, you might not get much competitive advantage from bucking that trend.

But if others in your line of business offer retirement benefits, you’ll risk losing your best workers to them if you don’t offer benefits, too. “In Minnesota, only about 5 percent of small employers with under 100 employees don’t offer some kind of retirement benefit,” Helmke says.

Also, most retirement plans offer some tax advantages — to the employee, but also to the employer. And small employers can be eligible for a tax credit worth some of the cost of setting up a plan.

Note that those are two different things: A tax deduction allows you to subtract the cost of an expense from your income, so you pay taxes on a lower income. A tax credit allows you to take the cost of that expense directly off your tax bill.

So a retirement plan can be good for your bottom line.

And some employers may feel a strong sense of duty to employees who need to save but have trouble doing so on their own. “A retirement vehicle is an appropriate way to address that issue of retirement savings for employees who may not be predisposed to do so,” Helmke says.


What Kind of Plan?

Pension plans once paid a guaranteed amount each month upon retirement, with the value set by the employee’s years on the job and salary in the last few years of work. Those “defined benefit” plans are very rare today, especially among small companies.

Instead, most workplaces offer some form of “defined contribution” plan, which resembles an Individual Retirement Account that many people set up for themselves.

The most common employer-provided plan is a 401(k), named after the section of the federal tax code that governs such plans. With a 401(k) plan, an employee can have part of his or her pay withheld and deposited in a special account. The account manager invests it according to the employee’s direction.

Most employers — more than 95 percent, reports, an information services website based in Portland, Ore. — match the employee savings with an additional contribution. How much varies, but the amount is usually determined by a formula and it usually has a ceiling — typically 6 percent of the employee’s pay. More than 1 in 4 employers — 27 percent – match employees’ contributions dollar for dollar, says, and almost as many — 23 percent — match 50 cents for every employee dollar.

Another option is the Safe Harbor 401(k) plan. Unlike regular 401(k) plans, where an employer match is optional, Safe Harbor plans require an employer match, according to the Internal Revenue Service. But some Safe Harbor regulations are lighter than for traditional 401(k) plans, which is why some employers prefer them.

Profit-sharing plans are another alternative, Helmke says. Under a profit-sharing plan, the employer makes an annual contribution from company earnings to special employee retirement accounts.

For employees, the standard 401(k) is going to be more predictable, while for employers, a profit-sharing plan offers greater flexibility. When times get tough, the employer can forgo paying into the plan — something not always possible with a 401(k).

“It might be that the employer wants to share in the rewards of the organization but doesn’t want to be locked into a particular contribution in good times or in bad,” Helmke says. “Within broad contribution and limits, a deferred profit-sharing plan does not require that there be set contributions for employees. It’s all going to be dependent on what the employer determines and declares for the period.”

For smaller employers, there are other plans as well, including the Simplified Employee Pension (SEP) and the SIMPLE IRA, according to the IRS. Typically, only the employer contributes to a SEP IRA, while the SIMPLE IRA is funded by employee and employer contributions. (The IRS offers a comparison table of plans at


What Will It Cost?

How much a retirement plan costs depends on the details. The U.S. Bureau of Labor Statistics has calculated employer costs for retirement average 3.6 percent of the total payroll dollar, Helmke says. That includes the costs of administering the overall plan for the employer, the initial outlay for setting up the plan, and the money the employer kicks in to match the employee savings. It doesn’t include the employees’ contributions to their own accounts or the fees for managing the individual employees’ investments; those are typically borne by the employees.

“If you want to offer benefits in order to attract and retain talent, the cost is relatively small compared to wages and other costs,” Helmke says.

Each kind of plan has regulations that govern its operation, so employers must enlist expert advice to comply. There are a wide variety of firms and consultants who can help you set up your plan. Helmke recommends you start by asking your lawyer or accountant for a recommended vendor. Ask tough questions and make sure you understand the answers before making a decision.

Whatever you do, don’t just put it off or kick the can down the road. “As the economy is starting to turn around, it’s not just business as usual,” Helmke says. “There’s a lot of change happening now. Employees are interested in these types of things, and employers would be well served to be thoughtful and deliberative about the decisions that they make.”


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