Employee Retirement Plans: A Buyer's Guide Credit: Hin255/Shutterstock

It takes a lot of planning and preparation for employees to enjoy their retirement years.

While most people want to get to a point where they don't have to trudge into work each day, if they aren't financially prepared for that time, it may never come. While the burden might be on employees to make sure they have saved enough for retirement, many believe that employers should share that responsibility.

To help employees make sure they have enough money saved for their golden years, many businesses offer an employer-sponsored retirement plan.

"At its most basic level, it's a savings vehicle that employers can choose to offer to their employees that allows those employees to save for their retirement on a tax advantage basis," said Chris Augelli, vice president of product marketing and business development for ADP Retirement Services.

With employee retirement plans, workers set a percentage of their paycheck that they want to invest in the plan.

"It comes right out of the employee's paycheck each and every time they are paid," Augelli told Business News Daily. "It automatically comes out pretaxed and automatically gets invested into the plan."

[For more read The Best Employee Retirement Plans and 15 Retirement Plan Providers for Your Business ]

Linda Wolohan, a spokeswoman for the investment management firm Vanguard, said employee retirement plans can come in a variety of shapes and sizes.

"The type of plan can vary in features, and can vary in terms of whether the employer makes all the contributions to the plan, the employee makes all the contributions to the plan or whether it's a joint effort," Wolohan said.

Joint efforts occur when employers offer a matching contribution option. Meghan Murphy, a director at Fidelity Investments, said that in addition to the money the employees invest on their own, many businesses also offer a matching program, in which employers match a certain percentage of the employee's contribution with their own contribution into the employee's retirement account.

"A common match is 100 percent on the first 3 percent," Murphy said. But if you go over that 3 percent, and contribute 5 percent, for example, the employer would just match the 3 percent in that type of match, she said.

With the uncertainty surrounding Social Security, employer-sponsored retirement plans have become much more important in recent years, Augelli said.

"People really need to be taking the onus for their own savings and personal retirement, and there is no better way to do that than to be an employer who is going to offer you one of these plans," Augelli said.

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Types of employer-sponsored retirement plans

Employers have many retirement plans from which to choose, and each comes with pluses and minuses.

For small businesses, the most popular options are 401(k) plans and Savings Incentive Match Plan for Employees Individual Retirement Accounts (SIMPLE IRAs).

Augelli said the SIMPLE IRA was designed specifically with small businesses in mind because these plans can be set up quickly, for a low cost. "They really are meant to be more of a one-size-fits-all solution — basic in their design, but offered at a very reasonable cost," he said. "It's kind of like a starter 401(k) plan."

With a SIMPLE IRA plan, employers are required to make either matching or nonelective contributions, and must give all employees the opportunity to participate in the plan. Additionally, employees are only allowed to contribute $11,500 per year to the account. These plans are generally available to businesses with fewer than 100 employees.

Small businesses that don't offer a SIMPLE IRA typically offer a 401(k) plan. Augelli said 401(k) plans provide employers with many more options and give employees the chance to contribute more money — up to $17,500 per year.

"A 401(k) plan offers a lot more flexibility," Augelli said. "They have more flexibility in terms of which types of employees are eligible to take part in the plan, how fast employer contributions may vest or be earned by the employees, and you can defer more."

Murphy said that originally, 401(k)s were meant to be a supplemental source of retirement funds, since many employers also offered their workers some type of pension plan. However, over the past decade, many businesses have eliminated their pension plans, which has put a greater emphasis on the 401(k).

"It is no longer supplemental," Murphy said. "The 401(k) has become the primary savings vehicle for the majority of Americans who will retire in the upcoming years."

When employers are choosing between a SIMPLE IRA and 401(k), they should consider the size of their business, Augelli said.

"If this is a business with five employees or less, [a] SIMPLE IRA is probably going to be the right vehicle for you," he said. "You aren't going to have a lot of need for customization, since you are most likely a smaller, younger firm."

Augelli said ADP suggests businesses in a growth mode with more than five employees strongly consider the 401(k) plan, as it will "give you those customizable levers to help you manage your expenses, help you manage different populations of employees in different ways and also offer the maximum savings opportunity."

Other retirement plan options that employers can choose from include Roth 401(k)s or IRAs. In these plans, taxes are paid on contributions up front when they are invested in the account, rather than when they are withdrawn in retirement. 

Simplified Employee Pension (SEP) IRAs are another option employers have. According to the U.S. Department of Labor, SEP plans allow employers to set aside money in retirement accounts for themselves and their employees. Under an SEP, an employer contributes directly to traditional individual retirement accounts (SEP-IRAs) for all employees.

Retirement plan benefits for employees

Employer-sponsored retirement plans offer employees a number of benefits. The biggest of these benefits is that it's an easy way for them to start saving money now for their retirement.

Employees who take advantage of employer-sponsored retirement plans "will be ready when retirement comes," Murphy said. "Our goal is to allow people to retire and live the same lifestyle they are accustomed to, but in order to do so, they need to save," she said.

There are also a number of tax advantages that come with many employee retirement plans. Augelli said most retirement plans allow employees to contribute money on a tax-free basis; the money isn't taxed until it is actually withdrawn from the account.

"So, if they go into retirement and take a withdrawal out of the plan, at that point, they are taxed," Augelli said. "The assumption [is], though, if they are in retirement, they are likely going to be in a lower tax bracket than they were at the point at which those dollars were first earned."

Augelli said the contribution dollars go in on a pretax basis and get invested from every single paycheck, and the earnings start to compound.

"Those earnings have accumulated pretax, which is a huge, huge advantage," he said.

By contributing pretax dollars into their retirement plan, Wolohan said, employees are not only saving for retirement, but also lowering their current taxable income.She said this is because the money is deposited into the retirement account before taxes have been deducted.

"Say you earn $30,000 a year and contribute 12 percent — or $3,600 — to your company's retirement plan," Wolohan said. "That reduces your current taxable income for the year to only $26,400."

The matching contributions are also a huge benefit to employees participating in a retirement plan.

"If an employer is offering you a matching contribution, that is one of the few things in life that truly is free," Augelli said. "That can quickly accumulate into a nice contribution that they are going to make into your retirement account."

Because the money comes out of a paycheck each month, employer-sponsored retirement plans offer workers a very simple way to save for their golden years, he added.

"Savings in these plans is easy and takes the indecisiveness out of it," Augelli said. "It is a great way to invest in your own future."

Additionally, the earlier in their career employees start using these plans, the more advantageous they can be.

"If you start saving when you're young, you can save a lot less of the dollars that you're going to put into the plan because you have such a longer time horizon over which those dollars are going to be earning [money]," Augelli said. "Put those dollars to work for you, and take advantage of a longer time horizon — and you don't even have to invest as many dollars to get to a healthy balance.

Murphy said the difference between starting to save for retirement at age 25 versus 35 is enormous.

"The earlier you start to save, the more likely you will be likely to reach the amounts that are necessary to survive in a retirement that could be 30 years," Murphy said.

Retirement plan benefits for employers

While the advantages to employees are fairly obvious, employer-sponsored retirement plans are also very beneficial to the businesses that offer them.

Retirement plans are an important part of retaining and attracting top workers, Augelli said. Retirement plans have "become an expected part of compensation plans," Augelli said. "Employees are looking for an employer who is going to offer them access to a retirement plan," he added.

The plans are especially enticing to employees when they include a matching contribution from the employer.

"It is really seen as a value in the workplace," Murphy said.

Ensuring employees are financially prepared for their retirement also benefits employers by giving them the opportunity to bring in new employees, Murphy said. She said employer-sponsored retirement plans are a big part of a business's workforce planning.

Murphy said without some help in saving for retirement, many workers will keep working for their company in order to earn a paycheck, which hurts an employers' chances of hiring new employees who will bring some fresh ideas to the table.

Many retirement plans offer vesting schedules, which also benefit employers. Vesting schedules are tied to matching contributions and ensure that employees who want all of the money their employer has contributed into their account don't immediately take their money and run. Augelli said vesting schedules are seen by businesses as an incentive for their employees to stay with the company.

For example, a typical vesting schedule is five years. Each year of the first five years that the employee works for the company, he or she would earn 20 percent of the matching contributions, Augelli said, adding that if an employee were to leave after two years, he or she would get only 40 percent of the money the employer had contributed into the retirement account.

"You would keep that 40 percent, and the other 60 percent is a forfeiture," Augelli said. "It is a cost-management tool for the employer." In the end, Murphy said, retirement plans offer employers the opportunity to help their employees take the first step toward saving for retirement

"We don't want people to have to retire and solely rely on the government and Social Security to survive, because certainly that doesn't cover everything that they've been receiving in income up to that point," Murphy said. "They need to be able to supplement that."

How to choose a retirement plan provider

For businesses to ensure both they and their employees are getting the most out of their retirement plans, however, it's critical that they find a retirement plan provider that offers all the features they need. While a good price and solid investment options should be top priorities when you're choosing a retirement plan provider, businesses may want to find a partner that will provide additional benefits.

To help small businesses get a better feel for what some of those added features are, retirement experts and business leaders with employee retirement plans in place offered some tips on what features to look for when you're choosing an employee retirement plan provider.

Reduces administrative burden

Considering most small business owners are incredibly busy, they should be looking for an employee retirement plan provider that will handle the entire administrative burden and make the process easy for them, Augelli said. That includes making sure the deferrals automatically come out of each paycheck and are properly deposited into the right investments, Augelli said.

"These plans can be complex, and they can be time consuming, so you want to go with an administrator who is focused on offloading a lot of your administrative burden," Augelli said. "You want to choose someone who is going to do that work for you, who is going to make it easy, take [up] less [of your] time and keep you compliant."

Educational tools

Businesses should look for a retirement plan provider that offers educational tools to help employees with the daunting task of saving for their retirement, said Julia Missaggia, director of talent for the communications firm Brownstein Group.

"We chose a retirement plan provider that has online calculators to help our employees estimate their retirement needs," Missaggia said. "These can be accessed at any time, and they help our employees make informed decisions when it comes to their accounts."

Online access

Missaggia said employers should also choose a retirement plan provider that allows employees to easily keep tabs on their retirement accounts.

"If you don't know how your account is performing, you don't know what adjustments to make," she said. "Therefore, we made sure our retirement plan website offers employees detailed information regarding the daily performance of their portfolio."

No kickbacks

Scott Swisher, owner of Shenandoah Valley Wealth Management, said it's critical to find an employee retirement plan provider that doesn't take kickback payments from any of the mutual-fund companies in which they invest. Rather than choosing to invest in funds that offer employees the greatest chance to make money, providers that accept kickbacks are often selecting plans that give them the best chance to make money, he said.

"Retirement plan providers who accept kickback payments from mutual-fund companies have a huge incentive to include [those] mutual funds in 401(k) plans because if they do, they make more money," Swisher said. "Plain
and simple."

On-site visits

Employers should look for an employee retirement plan provider that will send representatives to meet with employees face-to-face, to discuss both the retirement plan and retirement process, said Amy Gulati, a human resources business partner with the outsourcing and recruiting firm Helios HR.

"It allows people to discuss the company's plan, but also talk about their retirement savings goals in general," Gulati said. "It's a really benevolent thing for employers to do and is usually very popular."

Automation

Murphy said a nice feature some employee retirement plan providers offer are automation tools. These tools include automated investment options, for employees who don't know much about where they want to invest their money, and automated enrollment options, which automatically sign up all new employees for the retirement plan, as a way to encourage them to participate.

In addition, "There is an auto increase that, once people are in the plan and actually contributing, helps them bump up their savings a little bit each year," Murphy said.

Mobile app

It's also important to find a retirement plan that gives employees constant access to their accounts through their mobile devices, Murphy said.

"Having a good mobile strategy makes it really easy for people to save," she said. "They can then access their accounts on their phone or tablets."

Originally published on Business News Daily.