An Employer’s Guide in Choosing which Retirement Plan to set up

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There are many options with regard to retirement plan choices for your business. A proper analysis must be prepared to determine which option is best for you.

One of the difficult choices for an employer in deciding to sponsor a plan is which type of qualified plan to sponsor. Here is just a small list:

  1. Number of employees to participate: The more, maybe not the merrier. But the more, is less likely you will be pursuing a defined benefit plan and more likely pursuing a 401(k) plan.
  2. Age and compensation of the owner(s)/highly compensated employees. Despite what the folks protesting at Wall Street believe, one of the goals of setting up a retirement plan is saving the maximum for the owners and highly compensated employees of the business.  One way to achieve the maximum savings is the use of a defined benefit plan or a cross tested allocation that will award higher contributions to these high paid employees and some of the key factors are age and compensation.
  3. How much can the Employer afford to contribute? When it comes to defined benefit plans and safe harbor 401(k) allocations, as well as the near obsolete money purchase plans, the employer must dedicate a fixed contribution each year (which is decided after the end of the Plan Year). Does the Employer see that it has the cash flow over the next couple of years to make such a financial commitment? I can’t tell you how many times that I have had sole proprietors say they want to save the maximum under a defined benefit plan. All of a sudden, they needed to pare back after the sticker shock of the maximum contribution that the actuary determined.
  4. Ask the Employees. A small business is usually not a democracy, but is may be wise to ask employees on the input of setting up a retirement plan. Namely the questionnaire really should be tailored towards trying to indentify whether they see this plan as an important employee benefit  and if the employer decides the 401(k) route, whether the employees would defer. Now employees shouldn’t have a say in designing the plan since they aren’t going to be the ones funding the contribution.
  5. Find a financial advisor. If a small business has a non-owner employee, a financial advisor should be hired. No ifs, ands, or buts.

Proper plan design is critical when deciding on a company retirement plan. There are many alternatives that fit your situation now and you can change when circumstances warrant.

Please comment or call to discuss how this affects your company and you.

  • Starting A 401(k) Plan: 5 Things You Need To Know (
  • Safe Harbor 401(k) Deadline Looms for Small Business (
  • Your Employees Appreciate Your Company’s 401(k) Plan (
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