Revisiting Retirement Benefits: Is It Time to Sweeten Your Employees’ Plans?

The Pension Protection Act of 2006 contained provisions designed to encourage 401(k) plan sponsors to automatically enroll their workers in the plan to boost retirement savings and TDFs are often used as a default investment for workers who are auto-enrolled.

Adding a cash balance plan – the best of both worlds?

Although still quite popular in the public sector, the old-fashioned pension (or standard defined benefit) plan is out of reach for many small business owners and has been on the decline for three decades in the private sector, according to EBRI. However, cash balance plans are hybrid plans that combine some aspects of a traditional pension plan with those of a defined contribution plan (401(k)/profit sharing).

“Business owners that have the cash flows to support an additional employer contribution may want to consider installing a cash balance plan alongside their existing 401(k)/profit sharing plan,” says Rommerskirchen. “Using a cash balance plan in conjunction with their properly-designed 40(1)k/profit sharing plan could allow the business owner to contribute substantially more towards retirement than just a traditional 401(k) plan would allow,” he adds.

A cash balance plan defines the promised benefit in terms of a stated account balance, yet fluctuations in the value of the plan’s investments do not directly affect the benefit amounts promised to participants. Another advantage: Benefits of cash balance plans are protected by federal insurance provided through the Pension Benefit Guaranty Corporation.

Simplified Employee Pension (SEP), Payroll Deduction IRA or the simple IRA plan

Many small businesses that want to help their employees with retirement turn to Individual Retirement Accounts (IRAs), such as the Simplified Employee Pension (SEP). With a SEP, employers set up an Individual Retirement Account (IRA) for themselves and each employee, with the employer contributing the same percentage of pay for each employee, up to 25 percent of their salary (or $49,000, whichever is less).

The Simple IRA plan allows contributions by both the employer and the employee, whereas the Payroll Deduction IRA is funded by employee contributions without participation from the employer.

Providing retirement and investment education opportunities for employees

Year after year, employees surveyed by EBRI in the Retirement Confidence Survey continue to rank private employers as their most trusted institution, positioning small business owners in the role of guiding and providing for their own and their employees’ retirement savings.

“As far as sweetening the benefits, it is quite difficult for micro-companies and small businesses under 200 employees,” says Marcia Mantell, President of Mantell Retirement Consulting in Needham, Massachusetts. However, there are other things employers can do to help their employees prepare for retirement, she explains.

For companies who want to help their employees right now, but who aren’t yet ready financially to add employer contributions to a retirement plan, Mantell suggests creating non-monetary benefits for employees. Educational opportunities such as lunch-and-learn or hosted seminars about investing for retirement and retirement readiness, combined with in-house training for using online retirement preparation tools, will help employees gain a realistic view of retirement financial needs.

Don’t go it alone

“One of the most common areas overlooked in a retirement plan is the selection of an appropriate investment professional to advise the business owner,” says Rommerskirchen. With many small business owners wearing multiple hats, it’s difficult to stay on top of retirement benefit changes. Therefore it’s important to know exactly what services the financial advisor is going to provide for the plan, and how often you will meet with the financial advisor to review issues. You’ll also want to know how often the plan’s financial advisor will meet with your employees and how much experience he or she has, Rommerskirchenk recommends.

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