If you want to attract quality talent, your business needs to offer the right retirement benefits. Sometimes, small companies think there isn’t much they can provide, but that’s incorrect. There are plenty of choices out there for you and your employees. Here are a few.
When you think about retirement, defined benefit plans—also known as pensions—might come to mind. These are very popular in government jobs and used to be standard at big businesses. However, the percentage of private sector workers whose only retirement account is a defined benefit pension plan has fallen to just 4 percent, according to CNN Money. There are some advantages for small businesses that can offer a benefit like this—especially very small businesses with a highly-paid owner who is trying to maximize their own retirement benefits. It’s worth looking into.
Unlike the defined benefits of pension plans, 401(k)s are defined contribution plans. That is, you put in a certain amount and you get out what you get out—it’s all based on how well the stock market does. There are hundreds of plans to choose from and your employees can choose how much to contribute. They can also pick their investment strategies. Many businesses match funds up to a certain percentage. So, if an employee contributes 2 percent of their income to the 401(k), their employer will match that.
If you require employees to stay with your company for five years before matching (a practice known as vesting), it can be a great retention tool. However, there’s one caution to keep in mind with 401(k)s: when you are picking your plan, look at the fees. They can vary wildly from plan to plan.
These individual retirement accounts are also popular with small business owners. If you’re self-employed, you can open a SEP IRA for yourself. If you own the business and have employees, you can have a SIMPLE IRA plan for your employees and a SEP IRA for yourself, if you wish. There is a limit of $12,500 per employee ($15,500 if they are over 50), which is considerably less than the 401k limit of $54,000. However, unless you and your employees are extremely highly paid, it’s unrealistic to think that people will be frustrated they can’t contribute $54,000.
Which One Is Best for You?
All these plans have different tax benefits, contribution limits and expected payouts. Additionally, different companies have different fees. In other words, there isn’t a “right” plan or a “wrong” plan.
If your company is family-run and you expect everyone to work there throughout their career, then a pension plan might be your best bet. With a mobile workforce, a 401(k) or an IRA is likely the better option because the employees take their contributions with them when they leave. 401(k)s and IRAs don’t require onerous paperwork, which is a plus—and they don’t create long-term obligations like the pension plan does. Check out those two plans first and run everything by your accountant to be sure you’re making the right decision for your business.