Question:

I'm a small employer with 25 employees. I've considered starting a retirement plan for my workers, but I don't want to do anything complicated. Are there simple options for employers like me?

Starting a small business retirement savings plan can be easier than most business people think. There are a number of retirement options that provide tax advantages to both employers and employees.

By starting a retirement savings plan, you will be helping your employees save for the future. Retirement plans may also help you attract and retain a qualified pool of employees. What's more, you will be joining more than one million small businesses with 100 or fewer employees that offer workplace retirement savings plans.

Why save?

Experts estimate that Americans will need 60 to 80 percent of their pre-retirement income -- lower-income earners may need up to 90 percent to maintain their current standard of living when they stop working. So, now is the time to look into retirement plan options. As an employer, you have an important role to play in helping America's workers save.

401K Facts:

According to Southern California-based (401k) Enginuity (www.401kenginuity.com), twenty-year veteran in developing and running 401(k) administration and 401(k) software and recordkeeping systems, the Internet will be the primary delivery system for 401(k)s by 2007. Many web-based 401(k) plans will run on administration and recordkeeping platforms that plan providers will outsource to 401k specialists and 401k Application Service Providers (ASP).

The advantages of web-based online 401(k) plans are obvious to today's workers, and include use conveniences, real-time monitoring and reporting, and instant re-allocation of their retirement assets. The internet has also dramatically reduce the cost of 401(k) plan administration, saving plan sponsor 50% or more in ongoing fees and costs when compared to the older traditional labor-intensive plans. Outsourcing of 401(k) functions by plan providers will extend the trend towards lower cost, high-quality 401(k) products.

401(k) plan providers of all types, financial institutions including banks, insurance companies, brokerages, mutual fund companies, credit unions, and third-party administrators, are now actively outsourcing 401(k) administration and recordkeeping tasks to 401(k) ASPs --- vendors such as 401k Enginuity, whose sole function is to maintain, updated and supervise software-based 401(k) administration and recordkeeping systems on behalf of plan providers. 401(k) ASP vendors are responsible for all routine day-to-day 401(k) recordkeeping and administration functions, thus allowing the plan providers to reduce internal staff, eliminate the expense and complications of licensing, housing and running hardware and 401(k) administration software in-house. Plan providers can refocus and concentrate their efforts on to the needs of their plan sponsors and plan participants, and rely upon the outsourced ASP 401(k) vendor for the recordkeeping and technical "backbone" supporting providers' Internet-based plans. It is inevitable that some of this 401(k) outsourcing to ASPs will include secondary outsourcing of certain non-critical low-level routine day-to-day tasks to non-US locations, where labor costs are less yet the expertise is abundant.

Most private-sector retirement plans are either defined benefit plans or defined contribution plans. Defined benefit plans promise a specified benefit at retirement, for example, $100 a month at retirement. The amount of the benefit is often based on a set percentage of pay multiplied by the number of years the employee worked for the employer offering the plan. Employer contributions must be sufficient to fund the promised benefit.

A defined contribution plan, on the other hand, does not promise a specific amount of benefit at retirement. In these plans, employees or their employer (or both) contribute to employees' individual accounts under the plan, sometimes at a set rate (such as 5 percent of salary annually). A 401(k) plan is one type of defined contribution plan. Other types of defined contribution plans include profit-sharing plans, money purchase plans, and employee stock ownership plans.

Small businesses may choose to offer a defined benefit plan or any of these defined contribution plans. Many financial institutions and pension practitioners make available both defined benefit and defined contribution "prototype" plans that have been pre-approved by the IRS.

This brochure focuses on a few of the simpler options — SIMPLE plans, SEPs, 401(k) plans, profit-sharing plans, and payroll deduction IRAs.

All retirement plans have important tax, business and other implications for employers and employees. Therefore, you may want to discuss any retirement savings plan with a tax or financial advisor.

Here's a brief look at some plans that can help you and your employees save.

SIMPLE: Savings Incentive Match Plans for Employees of Small Employers

This savings option for employers of 100 or fewer employees involves a type of individual retirement account (IRA) and is the result of new legislation, the Small Business Job Protection Act of 1996.

A SIMPLE plan allows employees to contribute a percentage of their salary each pay check and to have their employer match their contribution. Under SIMPLE plans, employees can set aside up to $6,000 each year by payroll deduction. Employers can either match employee contributions dollar for dollar -- up to 3 percent of an employee's wage -- or make a fixed contribution of 2 percent of pay for all eligible employees instead of a matching contribution.

SIMPLE plans are easy to set up -- you fill out a short form, administrative costs are low, and much of the paperwork is done by the financial institution that handles the SIMPLE plan accounts. Employers may choose either to permit employees to select the IRA to which their contributions will be sent, or to send contributions for all employees to one financial institution (which will forward contributions of employees who elect a different IRA). Employees are 100% vested in contributions, get to decide how and where the money will be invested, and keep their IRA accounts even when they change jobs.

A SEP allows employers to set up a type of individual retirement account — known as a SEP-IRA— for themselves and their employees. Employers must contribute a uniform percentage of pay for each employee. Employer contributions are limited to the lesser of 15 percent of an employee's annual salary or $24,000. (Note: this amount is indexed for inflation and will vary). SEPs can be started by most employers, including those who are self-employed.

SEPs have low start-up and operating costs and can be established using a single quarter-page form. Businesses are not locked into making contributions every year. You can decide how much to put into a SEP each year -- offering you some flexibility when business conditions vary.

401(k) plans have become a widely-accepted savings vehicle for small businesses. Today, an estimated 25 million American workers are enrolled in 401(k) plans that hold total assets of about $1 trillion.

Employees contribute a percentage of their pay to the 401(k) plan on a tax-deferred basis through payroll deductions. Employers also may contribute to an employee's 401(k) account by matching employee contributions, usually up to a percentage of an employee's pay. The maximum amount an employee can deposit to a 401(k) is indexed for inflation. In 1997, that amount is $9,500.

While more complex, 401(k) plans offer higher contribution limits than SIMPLE plans and IRAs, allowing employees to accumulate greater savings.

Additional non-profit websites that include relevant unbiased information about 401k plans include: www.401k-office.com.

Employers also may make profit-sharing contributions to a plan that are unrelated to any amounts an employee chooses to contribute. The amount of these contributions is often set as a percentage of employees' pay; however, the employer can change the percentage or amount from year to year. A plan may combine these profit-sharing contributions with 401(k) contributions (and matching contributions).

Even if an employer does not want to adopt a retirement plan, it can allow its employees to save through payroll deduction, providing a simple and direct way for eligible employees to contribute to an IRA. This type of payroll deduction system is not generally considered a pension plan, provided that the decision of whether to contribute, and when and how much to contribute to the IRA (up to $2,000) is made by the employee. rrp

Many individuals eligible to contribute to an IRA do not. One reason is that some individuals wait until the end of the year to set aside the money and then find that they do not have sufficient funds to do so. Payroll deductions allow individuals to plan ahead and save smaller amounts each pay period. Payroll deduction contributions are tax-deductible by an individual to the same extent as other IRA contributions.

Simplified Employee Pensions (SEPs) - What Small Businesses Need to Know

Savings Incentive Match Plans for Employees of Small Employers (SIMPLE) - A Small Business Retirement Savings Advantage 

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