Employee Retirement Plans

By Bethany Ramos

There are many components employers must consider when looking at their best retirement plans. Here's a look at some of the challenges facing employers - and possible solutions.

A breakdown of company retirement plan options

Defined benefit pension plans have lost popularity recently. These plans specify a benefit an employee will receive at retirement, depending on salary, years of service, and retirement age. These plans are great for employees, as they don't need to contribute any current earnings to reap future benefits. But for employers, it can be costly.

Defined contribution plans are ideal for employers. These plans specify the contribution an employee can expect from the company. A defined contribution plan is also good for employees, as they're given money to invest for retirement. The downside for employees is that the burden of investing these funds falls on the individual.

Two common forms of defined contribution plans offered are profit-sharing plans and 401K plans. In fact, a whopping 70% of Fortune 100 companies in 2012 offered new employees a 401K or similar defined contribution plan as opposed to a traditional or hybrid pension plan.

Profit-sharing plans allow an employer to contribute a certain percentage of an employee's salary to the employee's retirement account. The employee will see the contribution directly in their account. The employer can choose how long it takes an employee to vest the funds, helping the company retain workers.

According to the IRS, employee contributions into a profit-sharing plan don't have a set limitation amount. Many employers use comp-to-comp profit-sharing for this reason; an employer will calculate total employee compensations and determine individual employee comps by dividing an employee's compensation by the total compensation amount.

401K plans, the most common employee retirement plan, allow employees to save a portion of their salary for retirement. An employer can decide to match the employee's contributions, which gives employees an incentive to save for the future. Like the profit-sharing plans, the employer match will vest.

The IRS categorizes a 401K as a qualified profit-sharing plan. Employee contributions are known as elective salary deferrals and will be excluded from an employee's taxable income by the IRS.

The employer and employee cost for administering the 401K plan is based on the number of employees and the diverse benefits that are allowed. Each provider will ask questions on which to base their numbers. The industry is extremely competitive and you will not find prices on line. This makes it somewhat of a "buyer's market" because you can compare offers and advise your number one choice that number two is offering a better rate or another advantage. By negotiation you can get the provider you want, the benefits your employees deserve and a price you want to pay.

How the best 401K plans work

A 401K plan allows an employee to save a certain portion of his or her current salary. Since these savings are tax-deferred until retirement, employees can get better tax rates by lowering their incomes. In addition, with the tax savings, the actual 'cost' of the money saved is less. A company 401K plan may be funded in one of the following methods:

Elective employee salary deferral offers employees the option to set aside voluntary contributions from a portion of their salary pre-tax in a traditional 401K or post-tax into a Roth 401K. There is no reduction in salary in a Roth 401K, however the interested earned on the after-tax contributions are not taxed in retirement.

Employer matched contributions. Often used as an incentive to spur employee participation, an employer will volunteer to match a portion of each employee's elective deferrals. Employer contributions are tax-deductible in a traditional 401K, although an employer cannot make matching contributions in a post-tax Roth 401K.

Profit-sharing employer contributions. Employers can opt to make profit-sharing contributions for eligible workers, even if employees don't set aside elective deferrals. Profit-sharing employer contributions are pre-tax and will not apply to post-tax Roth 401K contributions.

What to look for in 401K plans

There are many features to look for in the best 401K plans:

Diverse investment options for employees. A company needs to make sure that the provider it ultimately chooses to handle employee retirement savings has a vast array of investment options. Many financially savvy employees may desire self-directed accounts instead of investing in various funds.

Provider with a solid track record. There are many resources available online and through recommendations from friends and colleagues that company directors can leverage to help determine the quality of the plan they're evaluating.

Easy-to-understand cost structure. The best retirement plan company will have transparent and simple fee schedules. As of July 2012, retirement plan providers are required to disclose all fees, yet many companies are unaware that this rule does not apply to retirement plan proposals provided before signing a contract. Companies should read all fine print carefully and calculate how a nominal monthly or annual fee could add up over the life of an employer retirement plan.

Any business can benefit from heeding the tips above to choose the right 401K for its employees. Providing employees with the opportunity to automatically contribute to retirement can help to support staff morale and increase retention in the workplace.