Employee retirement plans: what you should know

An overview of the types of retirement plans

Written by Jean Marquit

One of the most important benefits that businesses offer their workers is a retirement plan. Employee retirement plans fall into two categories: defined benefit plan and defined contribution plan. When you look at what plan you’ll offer your workers, it’s wise to have an idea of what's out there. Most businesses, however, offer some version of a defined contribution plan.

Types of employee retirement plans

A retirement plan can be a good way to lure quality workers to your company. Small and large businesses do well when they have benefits available that help employees feel valued. Employees also like to feel as though they can prepare for their futures. Retirement plans – especially those with a match – serve this purpose. In some cases, it’s possible to overcome quality workers' concerns about pay with good benefits, including employee retirement plans.

There are two main types of employee retirement plans:

1. Defined benefit plan: These plans provide a specific dollar amount throughout retirement. Pensions, for example, are the most common of this type of business retirement plan. Using a formula, the business takes into account one’s salary, number of years worked, position attained, how much the employee is willing to contribute to his or her retirement account, and their age – all to decide how much money a worker is entitled to after they retire.
2. Defined contribution plan: Instead of paying a set dollar amount to employees, this plan sets up an individual investment account. This type of retirement account usually has tax advantages, and many businesses choose to match a certain percentage of the employee's contributions. How much the employee receives in retirement depends on how well the investment account performs.

More on defined contribution plans

Even though pensions are still available with some companies, it’s not surprising that defined contribution plans are now most common. These plans cost businesses less money in the long run, since they’re not bound by agreements to pay out a certain amount of money every month until a retiree dies. Here are examples of defined contribution plans that you can offer employees:

• 401(k) – Roth option available
• Simple 401(k)
• IRA – Roth option available
• SEP
• ESOP
• Profit-sharing plans

Before you decide on a business retirement plan to offer your workers, do research to see which arrangement would work best for your company. This way, you can offer a good benefit that helps you and your employees. Use BuyerZone’s free request for employee retirement plans price quotes service to start comparing offers from multiple providers.