Starting a Retirement Plan

Starting a plan will help your company stay competitive in today's tight labor market.
401(k) plans help you:

• Attract and retain the best employees
• Help your employees plan for retirement
• Take control of your own financial future
• 401(k) plans help your employees
• Defer federal and, in most cases, state income taxes
• Contribute through automatic payroll deductions
• Simplify investment decisions
• Receive immediate investment return when a company match is available

Today, 401(k) plans are more available, easier to administer and more affordable than ever before, whether you have 50 or 5,000 employees. In fact, approximately 400,000 companies are already benefiting from 401(k) plans, and 42 million employees are saving for retirement through company-sponsored plans. Americans have more than $1.9 trillion invested in 401(k) plans.

Choosing a Plan

There are several types of plans to choose from. Your decision will be based upon both your own personal goals and your goals for your company. The following questions will help you identify plans that may best suit your company. Plan service providers will be able to discuss your needs in detail and help you decide what type of plan is right for you.

• Do you have fewer than 100 employees and want to make a company contribution of up to 3% of pay? Consider the SIMPLE plan.
• Do you want to include employees who work less than 1000 hours a year? Consider a SEP Plan.
• Do you want contributions to vary according to company profits and be paid to employees immediately? Consider a cash profit sharing plan.
• Do you want contributions to vary according to company profits and be payable upon retirement? Consider a deferred profit sharing plan.
• Do you want to make contributions with the goal of participants achieving a specific "target" amount of money at retirement independent of company profits? Consider a target-benefit plan or a defined-benefit plan.
• Do you want your employees to be able to defer some of their current income so they can save in a tax-deferred account? Consider a 401(k) plan.
• Do you want to match your employees' contribution more than 3%? Consider a 401(k) plan.
• Do you want to make contributions independent of company profits? Consider a money purchase plan.

Types of Plans

Profit Sharing Plan

A plan established and maintained by an employer to provide for the participation in its profits by its employees or their beneficiaries. Company contributions may be determined either by fixed formula or at the discretion of the board of directors.

Cash Profit Sharing Plan

Profit sharing plan in which profits are paid directly to employees in cash, check or stock as soon as profits are determined. (This type of profit sharing plan is not a qualified retirement plan.)

Deferred Profit Sharing Plan

Profit sharing plan designed to provide benefits upon retirement. Benefits at retirement are based strictly upon the sum total of the contributions made and the investment results therein. The plan must provide a definite predetermined formula for allocating contributions made to the plan participants.

401(k) Plan

A defined contribution plan that enables employees to choose between receiving current compensation and making pre-tax contributions to an account through a salary-reduction agreement. Employers may also make contributions to employees’ accounts.

Money-Purchase Plan

A type of defined contribution plan in which the employer’s contributions are determined by a specific formula, usually as a percentage of pay. Contributions are not dependent on company profits.

Target-Benefit Plan

Contributions are based on an actuarial valuation designed to provide a target benefit to each participant upon retirement. The plan does not guarantee that such benefit will be paid; its only obligation is to pay whatever benefit can be provided by the amount in the participant’s account. It is a hybrid of a money-purchase plan and a defined-benefit plan.

Simplified Employee Pension Plan (SEP)

This is essentially an individual retirement account (IRA) to which an employee and his or her employer may contribute. Any employer contributions are excluded from an employee’s income.

SIMPLE Plan (Savings Incentive Match Plan for Employees)

A type of pension plan that may be implemented by employers with 100 or fewer employees in which the employer matches 100% of employee deferrals up to 3% of compensation or provides nonelective contributions up to 2% of compensation. These contributions are immediately and 100% vested, and they are the only employer contribution to the plan. SIMPLE plans may be structured as individual retirement accounts (IRAs) or as 401(k) plans.

Defined Benefit Plan

A type of retirement plan that provides each participant with a fixed income at retirement.