Intro to Employer Retirement Accounts
As an employer, offering competitive retirement plans to your employees is a key factor in retaining and rewarding talent. When it comes to your employer-sponsored savings plans for your workforce, there are many options available - some of which provide tax benefits while others offer the benefit of more time efficiency on the administration end. Through this blog post, we'll explore four different types of retirement plans for employers you can offer your employees: SEP IRAs, 401(K)s, government-sponsored retirement plans, and Simple IRAs. We'll discuss the features of each plan so that you can decide which plan would best suit your employee benefits plan.
401(K) Retirement Account
401(k) retirement accounts are a great retirement plan option for employees to save money for their future. However, this type of retirement plan still comes with its advantages and disadvantages for small business owners. Here are some of the benefits small businesses can reap:
● Employee Retention - Offering a 401(k) can help attract and retain talented employees. This is especially true of younger employees who are more likely to value retirement savings and appreciate the opportunity for long-term employment with benefits.
● Tax Savings - Small businesses are often able to take advantage of tax deductions when setting up a 401(k) plan. This can help reduce taxable income and increase overall profits.
● Borrow Against Account - Loans in the event of an emergency or financial crisis.
There are also some disadvantages of the 401(k) for your employer-sponsored savings plans. Here are the disadvantages of the 401(k):
● High Fees - The fees associated with a 401(k) plan can be much higher than some of the other employee retirement plans.
● Limited Flexibility - With a 401(k) you have less flexibility in the types of investments that can be made compared to other employer retirement accounts.
● Tighter compliance - 401(k)s require annual compliance testing and regular filings.
Simplified Employee Pension (SEP)
A SEP retirement plan is a retirement savings option specifically designed for small business owners and self-employed individuals. SEP stands for simplified employee pension. It allows employers to contribute to their employees’ retirement accounts while providing greater flexibility and tax advantages than traditional 401(k) plans. The employer can tailor the contributions according to their own needs and budget.
Benefits of a SEP Plan for Employers
SEP plans offer several advantages to small business owners, such as:
● Easy to set up and maintain; no administrative costs or filing fees required
● Flexibility in contributions – Employers can contribute different amounts each year according to their financial situation
● Tax advantages – employer contributions are tax-deductible
● Employees can enjoy investment returns on their retirement savings that grow tax-free until withdrawn
● Employees are immediately vested in the plan, meaning they have immediate access to all of their contributed funds
Drawbacks of a SEP Plan for Employers
Although SEP plans offer many advantages, there are some drawbacks to considering using the SEP for your company's employer-sponsored savings plans.
● Employers must provide account access and educational materials to employees
● Employees have limited investment choices compared to those found in traditional 401(k) plans
● High contribution limits – employer contributions are limited to 25% of an employee’s compensation, with a maximum contribution amount of $56,000 per year
● Employers must make contributions for all eligible employees – this can be expensive if you have a lot of eligible employees
SEP retirement plans are great for small business owners who have limited resources and don’t wish to match employee contributions. This creates a flexible option for contributions to employees such as an end-of-the-year bonus.
Simple IRA Plans
The Savings Incentive Match Plan (SIMPLE) IRA plan is an employer-sponsored savings plan that was designed to provide small employers an easy-to-administer retirement plan option. But, like any investment option, it has both advantages and disadvantages that need to be considered before making a decision about whether or not this is the right choice for your business.
Pros of a SIMPLE IRA Plan for Employers
● Easy to set up and maintain: There are no complicated paperwork requirements, making it relatively straightforward to establish and administer.
● Low start-up costs: The setup and maintenance fees associated with these plans are typically lower than those of other employer-sponsored retirement plans. This makes them more attractive to small businesses with limited resources.
● Tax advantages: Contributions made to the plan are tax-deductible, and earnings on the investments grow tax-deferred until retirement.
● Employer contributions: Employers can choose to make matching contributions up to 3% of an employee’s salary. This provides an incentive for employees to save more for retirement.
Cons of a Simple IRA Plan for Employers
● Limited contributions: Employees are limited to contributions of $15,500 in 2023 ($19,000 if over 50). This may be problematic for businesses that want to offer more incentives for their employees to save.
● Lower contribution limits: The plan's 3% maximum employer matching contribution is lower than that of other employer-sponsored plans.
● Lack of flexibility: The plan does not allow for loans or hardship withdrawals, which may be a problem for some employees who need access to their funds in the event of financial difficulty.
Overall, the SIMPLE IRA plan can be a good option for small employers who want to provide their employees with a retirement savings option without incurring significant administrative costs or paperwork.
State-Sponsored Retirement Plans
State-sponsored retirement plans can be a great way to increase your savings for the future. By investing in a state-sponsored plan, you can contribute pre-tax income and benefit from more generous tax treatment than a traditional IRA or 401(k). You'll also gain access to some of the best investment options available on the market, and there are no income limits which makes state plans incredibly flexible.
Most states offer a variety of options for investing in a state-sponsored retirement plan. For example, some states offer a payroll deduction IRA which allows you to contribute directly from your paycheck and save for retirement without having to set up an account on your own.
In Oregon, we have the Oregon Saves. Oregon Saves is a state-sponsored retirement program that makes it easy for Oregonians to save and invest for retirement. This plan gives everyone in the state the opportunity to get started saving, regardless of their financial situation. With no minimums or upfront costs, there's no excuse not to start planning for your future today.
The plan features employer contributions, automatic enrollment, and great tax advantages for employers and employees. Employer contributions are a win-win: they help increase employee retirement savings while lowering their taxable income.
The plan also allows you to invest in any of the available investment options, which range from conservative to aggressive. This provides more flexibility for Oregonians to choose the option that best meets their individual retirement goals.
Oregon Saves is dedicated to providing easy-to-understand, helpful resources so that you can make informed decisions about your retirement savings. You'll have access to online tools and calculators, as well as educational materials and financial advisors to help guide you through the process.
Conclusion
In summary, employers have a number of options to help their employees plan for retirement. Depending on the particular business and its objectives, one of the above accounts may be more beneficial than another. With proper understanding and research, employers can make an informed decision when it comes to choosing which type of retirement account is best for their business and staff. It is strongly recommended that all employers discuss each available employer-sponsored savings plan carefully so they can select the retirement account that most fully meets their individual needs. This research should involve analyzing specific features associated with each account such as contribution limits, employee participation requirements, and employer-matching guidelines. Doing this upfront work is essential in order to ensure that you're making the most informed decision when selecting a retirement plan for your business and employees.
Disclosure: Investment advisory services offered through Brookwood Investment Group LLC. Brookwood is an investment adviser registered with the Securities and Exchange Commission (“SEC”). Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services Brookwood offers, or that its personnel possess a particular level of skill, expertise or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.