You’ve been given the task to set up a new pension plan, or evaluate your existing plan. Of course you want the best pension plan that’s available... or at least the plan that is best for you. What questions should you be asking? This outline might help.
WHO is the plan designed to benefit?
- Employees: The best pension plan for involving all employees is a plan that allows for employees to save their own money into the plan. Employer contributions may be minimal or even discretionary. These plans include:
- SIMPLE IRA or SIMPLE 401(k),
- 401(k), or
- 403(b) plans
- Business owner(s): Small business owners might be shocked to see how much you are able to put away for yourself while contributing a relatively small amount to you employees; particularly if the demographics of your company include employees who are ten years younger than you. Many business owners we talk to would rather pay 20%-30% as a contribution to their employees than pay 20%-30% or more in taxes! Defined Contribution plans allow for contributions of up to $53,000 per year per person, and Defined Benefit Pension plans may double or even triple that amount. If you are a business owner looking for the best pension plan for you, ask about any of the following types of plans:
- 401(k) Safe Harbor with discretionary profit sharing
- Age-weighted or Tiered profit sharing formulas
- Cash Balance or traditional defined benefit pension plan;
- Key employees or groups/divisions: As long as certain regulations are satisfied, a plan may be designed to provide different contribution rates to different groups of employees. In limited circumstances, groups may also be excluded from participation in a retirement plan. The testing for plans with this special design is complex, so make sure that you are working with a company than is well qualified to perform the annual testing.
WHAT is the amount of money that the employer is willing to commit to the plan?
- None: If the employer is not able to make contributions to the plan, there are limited options for a plan to have employee deferrals/contributions only:
- 401(k) or
- 403(b) or 457(b) available for non-profits organizations only.
- Discretionary: Companies that have good years and not-so-good years need the discretion to make a pension contribution when they can afford to do so. Profit sharing plans, including the following, may be the best pension choice for these companies:
- 401(k) with discretionary match and/or discretionary profit sharing
- Profit sharing or SEP-IRA plans
- 403(b) with discretionary employer contributions for non-profits organizations only
- Regular annual contributions: If your company is committed to making contributions to your retirement plan every year, then a variety of options are open to you.
- SIMPLE IRA (2%-3% of eligible employees’ pay as an employer contribution)
- 401(k) Safe Harbor (3%-4% of eligible employees’ pay plus discretionary contributions of an additional 22%-23% of pay)
- 403(b) plans (fixed match and or employer contribution for eligible employees) available for non-profits organizations only
- 457(b) plans (employer contributions up to $18,000 in 2015) available for non-profits organizations only
- Profit Sharing or SEP (discretionary contribution of up to 25% of eligible employees’ pay)
- Money Purchase Pension Plan (fixed employer contribution of up to 25% of eligible employees’ pay)
- Cash Balance or traditional Defined Benefit Pension Plan (annual employer contributions required to meet minimum funding requirements as determined by actuarial calculations)
WHERE will the plan assets be held?
Money is deposited to the trust established for the plan can be managed in a variety of ways. Consider the options outlined here when deciding on the best pension plan for your organization
- Participant directed accounts allow each participant to choose from a variety of investments included in the plan’s menu. As long as certain requirements are met, the plan sponsor has limited liability with respect to investment choices that the participants make for their own accounts.
- Trustee directed accounts allow the plan trustee(s) to invest plan assets as they deem to be most appropriate for the plan participants. Plan trustees with discretionary authority over plan assets are held to the standard of the “prudent man” rule – they must invest as a prudent man would in the given situation.
- Professionally managed accounts are where the participant or the plan trustee hires professionals to manage some or all of the plan’s investments.
- A combination of any of the above choices may also be the best pension plan design for you. You may want the participants to manage their 401(k) deferrals, and have the plan trustee manage the employer contribution accounts.
HOW do you get started?
Once you have had a chance to think about the best pension plan for you, talk to at least two or three different providers. There are lots of people involved in the industry, and each has a slightly different approach. Listen to their proposals, and then you can decide what is best for you.
- Mutual fund company: Many mutual fund companies offer plan administration services as a courtesy or at a discounted price. The fees that they charge on the investments often supplement those services. Investments are typically limited to the funds offered by that company, and Plan design may be limited.
- Insurance company: Several insurance companies offer a retirement plan platform that consists of multiple fund families. They may offer a Guaranteed Insurance Contract as well. Some insurance companies off administrations services as part of their service, and others rely on a local Third Party Administrator for administration.
- Payroll company: Some payroll companies offer their clients a 401(k) plan. The service is “bundled” with the payroll as a convenience for the employer. The employer has significant responsibilities to provide the payroll company with certain data every year (e.g., determination of Highly Compensated Employees and Key Employees). Plan design is limited to what is available on the payroll company’s prototype document.
- Investment advisor: Most investment brokers, advisors and registered investment advisors can present you with a variety of options and compare pricing on different investment platforms. Some advisors are paid commissions from the investment company directly, and some may charge a fee as a percentage of assets. Request an advisor who has experience specific to retirement plans.
- Third Party Administrator: A TPA like Benefit Resources acts like the accountant for your plan. We make sure that your documents are drafted according to your needs and updated as needed. We perform the regulatory testing and compliance work every year, and we prepare the annual filings for you to submit to the government.
We are proud of the private pension system available to American companies. Whether you cover all of your employees, or benefit certain employees more than others. Whether you fund the plan every year or not, or whether you allow the plan participants to manage their assets or if you have them managed for you. There are some important considerations to take into account – let us help you find the best pension plan for you.