Carefully weigh employee retirement plan options

Q: It’s difficult to keep good employees in my small business. An employee retirement plan might reduce my employee turnover. What is your advice?

A: Offering some sort of an employee benefit package is important in attracting, hiring, and keeping quality employees in today’s competitive market place – and a retirement plan is a good way to get started.

According to Craig Narum, CFP,^® of Trisperity Wealth Advisory Group, there are other reasons why small employers should establish and offer retirement plans. “They offer one of the best ways to save money on personal and business income taxes,” says Narum, “and they allow employees to take advantage of tax-deferred investment earnings to accelerate growth of retirement savings.”

Popular small business retirement plan options include profit-sharing plans, 401(k)s, Simplified Employee Pensions (SEP), and SIMPLE IRAs. Profit-sharing plans are the most costly and complex, followed by 401(k)s.

The features vary among plans, so choosing the right plan depends on employer objectives. Can employees make pre-tax contributions? Does the employer want flexibility to vary contributions each year, maximize contributions for the owners and their family members, minimize administrative costs, or incorporate a vesting schedule which gradually transfers employee ownership of employer contributions?

For example, Narum advises that SIMPLE IRAs can be ideal for business owners with 100 or fewer workers who would like their employees to share responsibility for their own retirement savings, but don’t want the cost and complexity of a 401(k).

The most common type of SIMPLE IRA available to employers requires them to match each person's contribution up to 3% of annual compensation. In 2007, an employee under 50 years of age can't put in more than $10,500 -- not including the match -- or $13,000 for those 50 or over. The plan also allows an employer to cut the match to between 1% and 3% for any two years during a five-year period.

Money in a SIMPLE IRA grows tax-free, helping to boost returns over the long term. In addition, a tax credit is available to lower-income employees who make retirement contributions. The maximum credit is $2,000 and depends on the person's adjusted gross income and filing status.

Employers can generally deduct as a business expense contributions made on behalf of people in their retirement plan. And they can save on personal income tax because as employees of the firm they also can make pretax contributions.

Narum points out that these tax savings can often offset most, if not more than, the cost of the plan depending on how many and how much employees, including the business owner, contribute to the plan. Employers should seek the advice of a financial or employee benefits advisor to find the plan that best fits their situation.

May 13, 2007