Should you offer a retirement plan for your employees, and if you do, what type of plan should you make available? As your company grows and starts hiring more people, you might find yourself asking these questions. At Reliance Insurance Group, we can help you find the answers that will be best for the future of your business.
Should I Offer a Retirement Plan?
Let’s start by focusing on the simpler question: what are the benefits to offering an employee retirement plan in the first place? Does your company really need one, or should you just leave it to your staff to plan for retirement on their own?
The biggest advantage of offering a group retirement plan for your employees is that it helps make your workers feel valued. Employees aren’t just looking for jobs that offer good salaries these days. On the contrary, real benefits—health insurance, retirement plans, etc.—are just as much of a factor. As a result, having a group retirement plan for your employees can help both attract and retain top talent.
There are other benefits to having a company retirement plan as well. For instance, when an employer contributes to an employee retirement plan, those contributions are tax deductible. In other words, by having a retirement plan, you could be aiding your employee retention and cutting down on your annual tax burden at the same time.
What Type of Retirement Plan Should I Offer?
As you can see, providing a group retirement plan for your employees brings its fair share of advantages. However, it’s after you decide to implement a retirement plan that the most complicated question comes into play. Specifically, which type of retirement plan should you offer to your employees. At Reliance Insurance Group, we frequently assist employers in setting up three different kinds of plans: 401(k), 403(b), and 457.
All three of these retirement plans are classified as “defined contribution plans” (as opposed to “defined benefits plans”). Defined benefits plans are controlled by the employer, whereas defined contribution plans put the control in the hands of the employee. Specifically, in these types of plans, employees can choose whether to enroll, how much they want to contribute (usually through a paycheck deduction), and how their money will be invested (based on what options the plan offers). Employers will also often contribute money to employee accounts under defined contribution plans.
The most common type of defined contribution plan is the 401(k). In this type of plan, the employer sets up the plan and allows eligible employees to enroll and make contributions via salary deductions. Employers must decide at the outset what types of investment opportunities will be available as part of the plan. Employees then choose from these options when outlining their contributions and investments. In many cases, employers will match employee contributions to 401(k) accounts.
The IRS sets limits on how much employees can contribute to their 401(k) each year. However, most contributions are pre-tax, which means the IRS does not tax the money that employees contribute to the account. Instead, account holders will have to pay income taxes on 401(k) distributions once they are retired. Distributions cannot be taken before the age of 59 ½ years without the holder being subject to penalties.
While all types of employers can offer a 401(k) retirement plan, only certain tax-exempt organizations or businesses are permitted to offer 403(b) plans. Government agencies, colleges and universities, public schools, charitable foundations, and other similar entities can offer these plans.
Otherwise, though, the 403(b) operates almost identically to the 401(k). Employees can contribute pre-tax, taxes are deferred until distributions begin, and penalties are imposed on any distributions that take place until the age of 59 ½. The biggest difference, beyond the limited number of organizations that can offer 403(b) plans, is that most employers do not match employee contributions to 403(b) accounts.
The 457 plan, like the 403(b), is only available for tax-exempt entities and organizations. Similar to the 401(k) and the 403(b), the 457 is a voluntary plan into which employees can make pre-tax financial contributions. The employer contribution is more typical for 457 plans than 403(b) plans—though not as much of an expectation as with 401(k) plans. Often, organizations that can offer these plans will provide both, as an employee can reach the annual contribution limit for his or her 403(b), but continue contributing to a 457 plan (or vice versa). Employees can save faster and accumulate more wealth because they have two contribution limits they are working toward rather than one.
The biggest difference between 457 plans and 403(b) or 401(k) plans is the age requirement. Once an employee leaves the employer that sponsored their 457 plan, they don’t have to worry about age limits: they can start taking distributions as soon as they like, with no penalty. As long as a person is still working for the employer that sponsored their 457 plan, though, he or she cannot start taking distributions until the age of 70 ½. In other words, 457 plans are a “whichever comes first” kind of arrangement: members can start receiving distributions either when they leave their job or when they reach the 70 ½ age milestone—whichever occurs first.
Choosing the Right Plan
If your business is a privately-owned entity with no tax exemptions, then a 401(k) will likely be your optimal employee retirement plan. If you are a public or tax-exempt entity, though, making the decision might be more difficult. If you aren’t sure whether to choose 401(k), 403(b), or 457 as your group retirement plan or some combination of the above), Reliance Insurance Group can help you weigh the pros and cons of each. To get advice on the right plan for your company, or to start making arrangements to offer retirement benefits for your employees, give us a call at 732-602-0010.