At the time of this writing, there are only ten states that require employers to offer a retirement plan to their employees; of those states, Maryland is the closest state to the Carolinas that is included. If you are an employer wondering if you need to offer a retirement plan, the answer from a legal perspective is likely no, you do not. Instead of being a question of obligation, the retirement query becomes more about whether you can and should offer a plan for your employees. Like most things in finance, the answer is more nuanced than a simple yes or no.
Benefits of Offering Retirement Plans
Attract Top Talent
In many industries, the competition for recruiting skilled workers is intense. Declining unemployment rates in the United States may work in the jobseekers’ favor, but it presents challenges for companies looking for the best talent. Offering a benefits package that includes a company 401(k) plan may give one employer an edge over another in attracting the most qualified employees.
Retain and Motivate Employees
A high turnover rate means increased training and recruitment costs; if you have high-performing employees, you want to keep them! Looking after the financial wellbeing of your employees indicates your willingness to invest in their future.
Additionally, some retirement plans have profit sharing and stock options that help to further align your company’s goals with those of your employees. Retirement plan options that benefit employees more when the company prospers encourage positive performance, although it is important to balance these options with non-performance related benefits and to have a company culture that supports this kind of arrangement.
Aside from the potential setup intricacies, one of the most common reasons that employers of small businesses do not offer retirement plans is the perceived expense. However, the cost of this process does not have to be prohibitive and employers can also receive tax benefits for contributing to their employees’ qualified retirement plans. These contributions are considered business expenses and can be deducted from net income.
The first few years of establishing retirement plans may come with their own set of tax credits. For example, your business may be eligible to receive up to $500 for three years to cover the expenses incurred in setting up a SIMPLE IRA, SEP IRA, or a Self-Employed 401(k).
Business owners who set up retirement plans for their employees are eligible to benefit from those same plans.
Drawbacks to Offering Retirement Plans
Cost of the Retirement Plan
The most obvious drawback to offering a retirement plan is the cost associated with it. This does not only include what the employer contributes to the individual plan; it also includes all of the expenses incurred in setting them up (including time spent researching options), hiring out for administrative assistance, and compliance consultations.
Employees May Not Take Advantage of the Retirement Plan Options
According to a retirement study by Morning Consult that was published in April, 2019, nearly 1 in 3 adults have no idea if their employers offer retirement savings plans or not (Slide 20). Without benefits education, employees may not realize what they are entitled to, which means that the funds associated with offering retirement plans are not going to good use. 401(k) options can be especially burdensome for small businesses, but no matter the plan, it is vital to educate employees on their options so that they will actually be used.
Common Employer-Sponsored Retirement Plan Options
Retirement planning from an employer’s perspective can get complicated quickly, so the following is only intended to give a brief overview of a few popular options:
Simplified Employee Pension (SEP) IRA
SEP IRAs function much like traditional IRAs in that contributions are tax deductible and any investment growth is not taxed until funds are taken out at retirement. Unlike the traditional IRA, the SEP IRA allows contributions of up to $56,000, if that does not exceed 25% of the employee’s total compensation, and there are no “catch-up” provisions for those over a certain age. Employers are the only ones that contribute to the SEP IRA, and those contributions are tax deductible.
Savings Incentive Match Plan for Employees (SIMPLE) IRA
In contrast to the SEP IRAs, SIMPLE IRAs allow contributions from both employers and the employees. Once again, employer contributions are tax deductible, as are those made by the employee. SIMPLE IRAs may have a mandatory 2% employer contribution to all employee accounts or employers can choose a matching contribution of up to 3%. Employees can contribute up to $12,500 annually and there is a catch-up contribution permitted for those age 50 and older.
Traditional 401(k) plans can offer more flexibility of options than SIMPLE IRAs and they are the most common employer-sponsored retirement plan. These plans are usually implemented in larger businesses where it is more cost-effective to do so. Employer contributions often do not vest immediately, but most plans do offer matching contributions and some have profit-sharing features. In 2019, the contribution limit is $19,000 and a $6,000 catch-up contribution is permitted for those 50 and older.
Determining whether or not you should offer a retirement plan to your employees is a decision unique to each business, but there are definite benefits associated with implementing one. For more information on retirement planning for businesses, contact one of the experienced financial planners at Morris Financial Concepts.
The opinions expressed herein are those of Morris Financial Concepts, Inc. (“MFC”) and are subject to change without notice. This is not an offer to buy or sell a particular security or investment product. This material is for informational purposes only and should not be considered investment advice. MFC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about MFC, including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. MFC-19-19.[MS1]