IT
PAYS TO OFFER YOUR EMPLOYEES A 401(k) PLAN
By
Michael Falcon of Merrill Lynch
As
a small business owner you probably spend so much time dealing with
the day-to-day responsibilities of managing your business that you may
overlook retirement planning for your employees or even for yourself.
Because
Social Security is expected to continue to provide a lower percentage
of retirement income, individuals are becoming more responsible for
saving for their own retirement. The predominant sources of income in
retirement will come from individually driven personal savings vehicles
like 401(k)s, IRAs, savings and investments. All of this means that
it’s even more important for business owners to consider ways
to secure their own financial futures and help their employees do so
as well.
It’s
well known that defined contribution plans such as 401(k)s have become
increasingly popular in the workplace. But if you’re like many
small business owners your company may not offer a 401(k) plan—or
any type of retirement savings program yet. According to a Spectrem
Group report, only 15 percent of businesses with five to 99 employees
currently offer a defined contribution retirement savings plan. Of firms
with 11 to 50 employees only 31 percent offer some type of retirement
plan.
Even
if you do currently offer some other type of retirement plan you might
find that a 401(k) provides attractive benefits. But what benefits do
401(k)s offer that other plans don’t?
The Advantages of a 401(k) Plan
A
401(k) plan can have a significant positive impact on the success of
your business and is best suited for mature businesses with stable cash
flows. These plans provide the greatest number of features and tax advantages
and are one of the most popular types of employee benefit plans because
they meet the needs of both employers and employees.
As
an employer a 401(k) plan can be one of your biggest allies in attracting
and retaining superior employees who will help your company grow. Competition
for skilled workers is often fierce, especially, with millions of baby
boomers nearing retirement.
Some
tax benefits of offering such a plan include being able to deduct a
percentage of the “matching” contributions from your federal
taxable income as a business expense and being eligible to receive a
tax credit to cover 50 percent of a 401(k) plan’s set up costs
up to $500 a year for the first three years.
Along
with health care benefits, a 401(k) or similar retirement plan is one
of the key factors most people consider when they decide where they
want to work.
For
employees, 401(k)s are attractive because they can reduce their taxable
income by making salary deferral contributions. Employees also value
this type of plan because it offers a broad range of investment choices
while also providing flexibility to move plan assets if they leave the
company. Having a 401(k) can go a long way towards keeping existing
employees happy, productive and loyal.
A Wide Range of Options
The
most common type of 401(k) plan used by businesses is a traditional
plan funded with employees’ pre-tax contributions through payroll
deductions. These contributions are fully vested immediately meaning
that they cannot be forfeited.
Additionally,
employers can choose to make contributions to employees’ accounts.
These contributions can be set up to become vested over a period of
years which can offer a powerful tool for helping you motivate and retain
workers.
There
are other types of 401(k) plans that are also worth considering based
on the unique characteristics of your business and if you’re looking
to provide greater benefits to highly compensated or preferred employees:
- Safe
Harbor 401(k)
- Simple
401(k)
- Owner
only 401(k)
- Roth
401(k)
The above :
- Have
all the features of a traditional 401(k), but automatically satisfy
certain compliance testing in exchange for mandatory employer contributions.
- Allow
highly compensated owners and employees to maximize their contributions
without limits tied to the participation of other eligible employees.
- Aimed
at helping smaller businesses.
- Available
to employers with 100 or fewer employees who have received at least
$5,000 in compensation during the previous year.
- Contributions
to a Simple 401(k) must be fully vested
immediately.
- Designed
to cover only the business owner and his or
her spouse.
- A
potential option for sole proprietors and independent contractors.
- Helps
maximize savings and tax deductions by allowing you to contribute
as both an owner and an individual.
- May
enable you to make higher contributions than you could through other
types of retirement plans such as a SEP or Simple IRA.
- Contributions
are made with after tax dollars. That means no initial tax break,
but the account grows tax-free and withdrawals can be taken without
incurring income tax if you’re at least 59 1/2 and have held
the account for five years or longer.
- Best
for individuals who expect their tax rate in retirement to be higher
than it is now.
- Relatively
new plan that can be incorporated into new or existing 401(k) plans.
A
Financial Advisor can assist in helping you choose the most appropriate
plan for your business in the context of your overall goals and objectives.
Plan
selection will be based on a variety of factors including:
- the
size of your business and number of employees,
- the
benefits you’d like to offer,
- the
degree of flexibility you’d like in making contributions, as
well as,
- costs
and administrative requirements.
In addition, a Financial Advisor can help identify 401(k) providers
that will handle the administrative and reporting duties associated
with a plan giving you more time to focus on growing your business.
Regardless
of which plan you choose the message is clear: There’s no time
to waste. By setting up a 401(k) plan now you’ll strengthen your
business’s ability to compete in the marketplace and help ensure
a successful financial future for you and your valued employees.
Michael Falcon is Managing Director and Head of the Retirement Group
at Merrill Lynch.
© 2015 TLC Magazine Online, Inc. |