For decades, company pension plans were the mainstay method for workers to save for retirement.
Now, pension plans have virtually disappeared among private and public enterprises and only primarily seen in state and federal municipalities.
As pensions have gone by the wayside for businesses, other modes of retirement plans have come to the forefront for employers and their staff.
But some companies don’t take advantage of the various plans available to them, according to David D. Horton, a financial advisor with Oliver Wickes & Associates, a private wealth management firm in Reno. While he says the majority of larger employers offer some type of benefits package, he finds that smaller firms are less likely to participate in them.
Horton said smaller companies tend to think offering a retirement package is often too expensive or time consuming to offer to their employees, often leaving the workers with the responsibility of figuring out their own retirement plans.
But he believes it can be very beneficial to companies in the long run.
“Most small business owners (often those with less than 15 employees) want to look at profit and are not as concerned with keeping employees,” Horton said. “What they often overlook is the benefit of keeping employees and giving these type of packages.”
Horton explained that offering retirement packages can increase employee retention, thus reducing the cost that comes with a company turnover. This could turn out to be an incentive for good employees to stay at a company, especially when the younger generations tend to have nomadic career paths.
“For whatever reason, Millennials have a tendency to move around from job to job,” Horton said. “For the older generation, you’re looking for where you can stay longer and train the next generation coming to your business. As the younger generation comes through you have a benefit of retaining those employees.”
Companies that offer retirement plans can also qualify for certain tax incentives.
A 401(k) is probably the most well-known plan and geared for larger employers. Employees can make contributions to a 401(k) account and can choose from investment options available within the plans. Companies can also choose whether to match employee contributions to an account. But if employers go this route, they must offer it to all employees.
“For companies with 50 to 100 employees a 401(k) plan is really the only way to go,” Horton said.
Another method is a SIMPLE IRA plan (Savings Incentive Matching Plan for Employees Individual Retirement Arrangement). This is designed for smaller companies and allows employees to choose to make salary reduction contributions while employers are required to make either matching or nonelective contributions.
The other main retirement plan is a SEP IRA (Simplified Employee Pension Individual Retirement Arrangement). Under this plan employers make contributions to their own retirement savings as well as those of the employees.
But under the latter two plans employers don’t have to offers plans to all employees, which Horton said some companies elect to do in order to reduce cost.
Horton said the retirement planning landscape is ever-changing, even from year-to-year. Horton said the Employee Retirement Income Security Act of 1974 (ERISA) was a game-changer in the retirement planning industry.
The act established minimum standards for pension or retirement plans and established intensive rules for federal income taxes. It also put more of the onus on private companies to manage plans
He finds that more and more it’s forcing the HR departments of large companies or the small business owner to keep an eye on the industry.
“It’s becoming more and more labor-intensive for human resources departments and the small business owner to keep up with those rules and regulations,” Horton said. “More small businesses want to wash their hands of it because they don’t want the extra workload.”
With all the rules and regulations, Horton encourages business owners to consult third-party administrators well-versed in retirement planning laws on an annual basis.
He said that expanding companies are particularly susceptible because growth could cause a company to change their retirement offerings. To that, he said companies should look what plan fits them best long-term and not have to make changes down the road.
“Growing companies may have that expansion problem when it comes to retirement plans,” Horton said. “Communicating with a business owner is key because you don’t want them to have a plan and then say a year later, they change their mind. Unwinding things can be harder than starting, both for the owner and for the employees.”
