When considering whether to offer your employees a retirement savings option, you might think you really only have two options – a traditional pension or a 401(k). There’s quite a bit more complexity to it than that, but before we address the finer details, it’s important to draw the distinction between these two types of retirement accounts. In a traditional pension, the employer was solely responsible to contribute to and manage an employee’s retirement fund. Conversely, a rise in the popularity of 401(k)s has put the onus of retirement savings on the employee rather than the employer. But, employee empowerment is neither the only benefit of this plan nor its only consideration. If offering your employees a 401(k) retirement plan seems like the next right move for your company, it’s important to understand both the benefits it offers to you and your employees and the options you’ll have when considering which program design best suits your needs.
If you’re looking into offering your employees a retirement plan, you’ve probably already provided them with insurance coverage options. Good decision, as retirement programs and insurance benefits attract more qualified, talented candidates than any other perk a company typically offers potential hires. And, once they’re hired, they contribute to a sense that the long-term financial well-being of an employee is valued, which bolsters retention rates. After all, if we were given two job offers entirely equal, except that one offers a retirement savings program and one didn’t, we all know whose proposal we would accept.
A 401(k) plan can offer additional value to an employee if the employer opts to include profit sharing in their retirement program. This functions basically as an employee bonus that is immediately deposited into their retirement account, tax-deferred until after their interest has accrued, and they’ve entered retirement. Clearly, providing employees with a 401(k) can have positive impacts on them, but there are important benefits for the employer, too. On top of attracting and retaining a qualified, talented staff, all contributions to an employee’s 401(k), including profit share bonuses, are tax-deductible!
Before your new program can be rolled out, you’ll need to decide whether and how you want to contribute to your employee’s savings. You can choose to not contribute, at all, which simply provides you and your employees with a tax shelter to save funds under until retirement. You can also make outright contributions, or you can make your contributions contingent upon what your employees are saving, i.e. an employer match program. This standard design allows for maximum customizability and is popular for that reason, but it also requires passing a yearly nondiscrimination plan. Employers who choose a Safe Harbor profit-sharing design receive an exemption from the test because they are then required to make contributions aligning with specific rules; typically, these contributions have to vest immediately. A third option worthy of research is that of the SIMPLE 401(k), which is very similar to the Safe Harbor plan, except that it is designed specifically for businesses of fewer than 100 employees.
All retirement savings programs have their pros and cons, and, with many options, your company’s retirement plan will (and should) be as multi-faceted as your business is. As with most things, it’s best to partner with an experienced consultant who will help you explore all available options and streamline the logistics of implementing your new retirement savings program. Noble Davis has 31 years in the consulting industry, and, with more than 20 experienced employees, you can be sure we have the insight necessary to craft and support a retirement program plan that fulfills every aspect of your company’s needs and vision. Reach out on our website for more information!