Retirement Savings Plans Don't Have to Cost a Fortune
For an updated list of available retirement plans and annual plan limits, reference our employee retirement plan chart.
In today's sizzling job market, attracting and retaining valuable employees is no longer a matter of simply providing a competitive salary. Job seekers are increasingly asking about additional benefits, with retirement savings plans often standing near the top of their agenda.
Yet while 80% of large corporations offer some type of retirement savings plan, only 1 in 4 small companies can say the same. The explanation? Many small companies believe they lack the infrastructure and financial resources needed to offer such a plan.
Just because your company may not be able to afford the administrative and record keeping costs associated with a 401K plan, it doesn't mean that you are without options. Your business may in fact be eligible for a cost-effective retirement alternative called the SIMPLE-IRA.
Introduced by the Small Business Jobs Protection Act of 1996, SIMPLE is an acronym that stands for "savings incentive match plan for employees." The plan is targeted at businesses with 100 or fewer workers that currently offer no other retirement savings plans to their employees.
The primary catch with the SIMPLE-IRA is that employers are required to make contributions to the plan. The first contribution method encourages employee participation by requiring the employer to match all employee contributions up to 3% of their salaries, with a $6,000 limit. There is also a fixed contribution option, where you pay a flat 2% of a person's salary, up to a maximum of $3200. This contribution is required for all participating employees, regardless of whether the employees contribute on their own. A 401K plan, in contrast, does not require employer contribution.
Mandatory contribution is not as bad as it seems, though. Take, for example, a company with 10 employees. Assuming you opt for the matching contribution method, your exposure is $300 per $10,000 an employee is paid. If the average salary is $40,000 and all employees participate in the plan, your company would need to contribute a maximum of $1200 per employee. This payout can even be lower, though, since employers are allowed to contribute a lower percentage for two out of every five years.
A more difficult-to-address criticism of the SIMPLE-IRA is that employer contributions vest immediately, giving the employee immediate ownership of all funds. This limits the effectiveness of the SIMPLE-IRA as an employee retention tool. In addition, annual SIMPLE-IRA employee contributions are capped at $6000, whereas 401K plans have a potential maximum employee contribution limit of $10,000. A 401K plan is better suited for compensating highly-paid employees and encouraging employees to stay longer.
No matter its slight drawbacks, the undeniable advantage of SIMPLE-IRA plans is that they are less expensive to administer. Set-up fees can be as low as $15-$25 per employee, with annual administrative and recordkeeping fees ranging from as low as $0-$600+. This is considerably less than the few thousand dollars associated with a typical 401K plan.
Now, retirement savings plans are available for companies of all sizes. If your company has up to 15 employees and experiences little turnover, you'll find a SIMPLE-IRA can be difficult to beat.
Quick tips
Shop around. Make sure to shop around and get several quotes- annual fees can vary drastically.
Survey your staff. Get a sense for how eager employees are to contribute to their accounts. The fixed contribution may be more cost-effective if not many want to defer their salaries.
Growing companies have different needs. As you grow, you may find that a 401K plan may make more sense. By the same token, tight cash flow might mean that the SIMPLE-IRA may need to be temporarily put on hold.
