Planning for retirement is important for employees, regardless of their age. That’s where employee retirement benefits come in. Employers can help employees prepare for their retirement by choosing the right benefit plan and vendor, and ensuring retirement options are both appealing and cost-effective. This guide explains what to look for in an employee retirement plan.
Many businesses offer an employer-sponsored retirement plan to help employees save enough money for their golden years.
“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-advantaged basis,” said Chris Augelli, head of retirement channel marketing for U.S. intermediaries at T. Rowe Price.
Workers can use employee retirement plants to set a percentage of their paycheck to invest in the plan each pay period.
“It comes right out of the employee’s paycheck each and every time they are paid,” Augelli said. “It automatically comes out pretaxed and automatically gets invested into the plan.” [Looking for an employee retirement plan for your business? Check out our recommendations for the best employee retirement plans.
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Employer-sponsored retirement plans are common in the workplace. It’s important to understand how these plans are structured and how your company – and your employees – can get the most out of your benefits package.
Linda Wolohan, former communications manager for investment management firm Vanguard, said employee retirement plans 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.
A joint effort means the employer offers a matching contribution. Meghan Murphy, vice president and team lead for life events at Fidelity Investments, said that in addition to the money employees invest on their own, many businesses match a certain percentage of that amount with their own contribution to the employee’s retirement account.
“A common match is 100% on the first 3%,” Murphy said. It works like this: if the employee goes over that 3% – contributing 5% of their paycheck, for example – the employer would just match the 3%.”
With the uncertainty surrounding Social Security benefits, 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 [with] an employer who is going to offer you one of these plans,” he said.
Employee retirement plans allow workers to save pretax dollars for retirement in investment accounts that can grow over time. Some employers offer matching contributions to encourage employees to participate.
There are major benefits to offering retirement benefits to your employees, such as increasing productivity and attracting new talent. An employee retirement plan can form the backbone of your benefits package and become part of a positive company culture that increases employees’ well-being.
To break down the importance of employee retirement plans, we’ll address possible benefits from two different viewpoints: employees and employers.
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.”
The earlier in their careers employees start using these plans, the more advantageous the plans can be.
“If you start saving when you’re young, you can save a lot 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 [more 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 in 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,” she said.
Employee retirement plans come with many tax advantages. Augelli said most retirement plans allow employees to contribute money on a tax-free basis; the money isn’t taxed until it is 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 become invested from every single paycheck. From there, the earnings start to compound. “Those earnings have accumulated pretax, which is a huge, huge advantage.”
“By contributing pretax dollars into their retirement plan, employees are not only saving for retirement but also lowering their current taxable income,” Wolohan said.
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% – or $3,600 – to your company’s retirement plan. That reduces your current taxable income for the year to only $26,400.”
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 your paycheck each month, employer-sponsored retirement plans offer a simple way to save for your retirement, 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.”
While the advantages to employees are fairly obvious, employer-sponsored retirement plans are also beneficial to the businesses that offer them.
Retirement plans are an important part of compensation, Augelli said. “Employees are looking for an employer who is going to offer them access to a retirement plan.”
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 your employees are financially prepared for their retirement also benefits your business by helping you attract new employees, Murphy said. She said employer-sponsored retirement plans are a big part of a business’s workforce planning.
Without some help in saving for retirement, Murphy said, employees might keep working for your company past typical retirement age just to earn a paycheck, which hurts your chances of hiring new employees who will bring fresh ideas to the table.
Many retirement plans offer vesting schedules, which can benefit employers. Vesting schedules are tied to contribution matches and ensure that employees who want all of the money their employer has contributed to their account don’t immediately take their money and run. Augelli said many businesses use vesting schedules as an incentive for their employees to stay with the company.
For example, a typical vesting schedule is five years. Each of the first five years that an employee works for your company, they would earn 20% of the matching contributions, Augelli explained. If the employee were to leave after two years, they would get only 40% of the money your company could contribute to the retirement account.
“You would keep that 40%, and the other 60% is a forfeiture,” Augelli said. “It is a cost-management tool for the employer.”
Aside from this, there is evidence that employees highly value retirement benefits provided by their employers. The majority of respondents to TIAA’s 2022 Employee Retention Survey (82%) said benefits were highly important when considering changing jobs. Retirement benefits ranked among the most desired at 77%, according to the survey.
Employee retirement plans offer benefits for both employees and employers. For employees, they are a vehicle to save money, have tax advantages, and can result in free money if the company offers a matching contribution. For employers, they can help attract and retain employees.
Employers have many retirement plan options, each with pros and cons. For small businesses, the most popular options are 401(k) plans and Savings Incentive Match Plan for Employees Individual Retirement Accounts, commonly known as SIMPLE IRAs.
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,” he 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 401(k) plans were originally 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, putting 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.”
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 allow all employees to participate in the plan. 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.
When employers are choosing between a SIMPLE IRA and a 401(k), they should consider the size of their business.
“If this is a business with five employees or less, [a] SIMPLE IRA is probably going to be the right vehicle for you,” Augelli 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, where he formerly served as vice president of product marketing and business development, suggests that businesses in growth mode with more than five employees strongly consider the 401(k) plan.
“[The 401(k) 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,” he said.
Employers’ other retirement plan options include Roth 401(k) plans and IRAs. Under these plans, taxes are paid on contributions when they are invested in the account, rather than when they are withdrawn in retirement. These types of retirement plans are more liquid so employees can access them if needed.
Simplified Employee Pension (SEP) IRAs are another option for employers. 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 a SEP, an employer contributes directly to traditional individual retirement accounts (IRAs) for all employees.
These retirement plans mirror 401(k) plans, but are offered only to state and government employees.
There are various types of retirement plans, such as 401(k), SIMPLE IRA, SEP IRA and 457 plans. The most commonly seen include 401(k) plans and SIMPLE IRAs.
While a good price and solid investment options should be top priorities when you’re choosing a retirement plan provider for your business, you may want certain features to ensure you and your employees get the most out of the retirement plan. The retirement experts and business leaders we spoke to offered some tips on features to look for in an employee retirement plan provider.
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.
“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.”
The best employee retirement plan providers offer educational tools to help employees with the daunting task of saving for their retirement, said Julia Missaggia, chief people officer at CMI Media Group and Compass.
“We chose a retirement plan provider that has online calculators to help our employees estimate their retirement needs,” she said. “These can be accessed at any time, and they help our employees make informed decisions when it comes to their accounts.”
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.”
Scott Swisher, managing principal at Swisher Financial Services, 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, plain and simple,” Swisher said.
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. This is especially useful if your employees have a choice in plans, as selecting from a variety may be confusing to some employees.
Murphy said automation tools are a nice feature some employee retirement plan providers offer. These tools include automated investment options for employees who aren’t sure where 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.
“There is [also] 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.
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.”
Look for an employee retirement plan provider that takes on the administrative burden of the plan, offers online and mobile access, and provides educational and automation tools to help employees maximize their savings.