The Basics of Retirement Plans

It takes a tremendous amount of work to get your business up and running and, in the beginning, the company may have just been you and one or two other people. Now, as you achieve success the workload has increases and the need for more employees becomes a real consideration. What entices potential employees? What can you offer, besides a salary and a cool company logo, to the talented people who can fill out your staff? The answer is an Employee Retirement Program.

Profit-Sharing Plans

One of the first plans that most businesses consider is some type of Profit-sharing program which can be used as a motivation for employees to continue to grow the business because, the better the company does, the more money is available to them within this program. The funds are managed and access by employees either when they retire or, possibly, before-hand but with a substantial penalty.

There are numerous types of Profit-Sharing Plans and each of them is administered differently and some plans even work in conjunction with other Retirement Plans such as 401(k)s. Most banks and financial institutions offer Profit-Sharing Programs for small businesses that vary in complexity.

The 401(k) Plan

Without a doubt the most popular form of Retirement Plan in this day and age is the 401(k) Plan. These came into prominence during the 1980s and truly exploded in popularity during the stock market boom days of the 1990s. 401(k)s are also known as examples of Defined-Contribution plans because employees define how much they put in, but there is no guarantee of an amount they will get back out of it.

A 401(k) Plan takes deductions out of an employee's paycheck and deposits it into an account which is then normally divided amongst various stocks and mutual funds. With each paycheck more money is added while, at the same time, the funds earn money depending on how the stock market performs. Needless to say, there is some risk since the funds depend almost entirely on how stock perform and during down times, the amount of money available can be substantially less than during boom times.

The money can be taken out before retirement in the form of loans and employees can also cash out their 401(k)s early, but if they do so there is a substantial tax hit. If they keep the funds in their 401(k) until they reach retirement, they can start accessing the money with much lower income tax issues.

The Defined-Benefit Plan

A Defined-Benefit Plan is also what used to be referred to as a Pension Plan. It is a specific amount of money set aside by the company that employees can tap into when they retire and, because of this, is known as a "Defined Benefit" because the plan will specifically dictate how much money an employee gets per month. For example, an employee may get $1,000 a month for the length of their retirement.

There are versions of Pension Plans that exist today known as "Simplified Employee Pensions" that can be set up even for a small company by a financial institution. Some of these SEPs have low start-up costs and low maintenance costs as well.

Defined-Benefit Programs are heavily monitored by government agencies and specific rules exist for who is eligible, and how much and how different employees at different levels can be treated. Highly-compensated employees can also have very special and specific rules that apply to them.

IRAs

By definition most companies ignore IRAs because they think they are something sought out by individual employees and not something a company has to deal with. IRA stands for Individual Retirement Account and it normally functions much like a 401(k) plan with an employee contributing money to an account that is then distributed around a number of stocks and mutual funds.

However, IRAs can be set up through an employer and helping employees set up IRAs is often an excellent way to start a Retirement Program. An employer can work with a financial company who then helps the individual employees find the IRA that works best for them. Then the financial company will work with the employer to ensure that the proper paycheck deductions are taken from the employee's paychecks.

The rules on how much an employee can contribute, and when, if such a route is taken is determined by the IRA and there are specific rules involved here that the financial institution can help you with.

Conclusions

In each of the examples listed there are numerous options with literally hundreds of different 401(k) plans and most of your larger financial companies will have information about each of them and ways to help you manage the costs, paperwork and administration. Within the other plans there exist many sub-options as well.

So, while getting your company up and running is a major accomplishment, continuing to grow is a key factor for your companies' future and in order to grow, you will need to attract the best and brightest employees in your chosen industry. In order to do that, you will need to provide them with a benefits plan that is attractive and competitive and one of the key components of that plan should be a quality Employee Retirement Plan.