I am amused at how often business owners refer to all types of retirement plans as 401(k) plans. There are actually many types and varieties of retirement plans; and ironically, I seldom recommend a 401(k) plan to a business owner client who is starting a retirement plan for his or her company.  
   
The conversation usually begins something like this:
 
“Jason, I think I am ready to start a 401(k) for the business.  How much will it cost me, and how much do I have to put in for my employees?”

Before we delve into my perspective on the best starter retirement plan for businesses (which I will cover in my next article), I’m going to provide a top line overview of the basic plan types. There are two basic qualified retirement plan types available to businesses today: 1) defined benefit and 2) defined contribution.  

A defined benefit retirement plan requires the employer to pay a certain level of benefit to each retired employee. This plan type is similar to a pension. Upon retirement, the company contributes a specific benefit amount to each retired employee. The amount paid is usually determined by a formula that incorporates a variety of key factors, like the employee’s salary history and longevity. The company is typically required to pay the benefit for the lifetime of the retiree.  

A defined contribution plan requires the employer to pay a certain level of contribution to employees while they are still working. In simple terms, think of a 401(k) company match. The employer is required to contribute a certain amount into an account for each employee. Upon retirement, the employer is no longer required to make contributions. It’s easy to understand why the private sector in America has all but stopped using pensions in favor of plans that have no ongoing, post-retirement financial obligation. It’s also easy to see that a newer business would favor this method since they aren’t typically financially stable and secure enough to promise an employee a lifetime of retirement benefits.  

Within the defined contribution category, there are several specific types of plans to consider. Here is a brief list:

• 401(k)
• Profit Sharing
• SIMPLE IRA
• Money Purchase
• Keogh
• 403(B) and 457 for non-profits

 The various plans offer different features and benefits and varying levels of customization for employees and employers. Additionally, they all have compliance and tax requirements that must be met in order to receive the maximum benefit from the plan. More features and benefits generally equate to more requirements, and subsequently, more administration costs for your business.  

While starting a company retirement plan can be viewed as a single task, managing your company retirement plan is an ongoing process; time and resources must be earmarked to properly maintain fiduciary responsibilities.  Being efficient and effective in managing your company retirement plan can make it a powerful and valuable employee benefit. However, inefficiencies and poor decision making can result in lost time and money.     

There are several functions that financial advisers can serve throughout the process of designing, implementing, managing and monitoring a company retirement plan. It’s important to work with professionals who understand the scope of what is possible so that creativity and design can be maximized. Choosing a financial professional who offers a broad array of products and services allows you to customize a plan tailored to your business model and goals. Variety also indicates that your adviser is willing to recommend plans that are in your best interest, rather than simply what they know or sell best. Finally, before you decide which plan is best for your company, choose a professional that is willing to educate you and keep you up to date on this rapidly evolving industry. 

In my next article, I reveal the retirement plan that I recommend most often for businesses that are starting their first plan and share the reasons why. In the meantime, if you would like to learn a little more about retirement plans, or chat about your company retirement plan, give me a call.         

Jason Wheeler is currently the CEO and a Wealth Consultant at Pathfinder Wealth Consulting. Pathfinder specializes in comprehensive financial, estate and tax planning services, investment management, and risk management (insurance) for business owners and successful executives. Jason Wheeler offers securities and advisery services through Commonwealth Financial Network®. Member FINRA, SIPC, a Registered Investment Adviser. To learn more about Pathfinder Wealth Consulting, visit www.pathfinderwc.com. Jason can be reached at [email protected] or 910-793-0616.