In the world of retirement plans, there is no “one best plan” for all companies. You must first list the goals and objectives for your retirement plan. With the ever-changing demographics of the work force, the goals and objectives can and will change over time. Plans that have been in place for several years need to be reevaluated to ensure they are meeting the current goals and objectives of the company. Two identical companies may have different plans due to different goals and objectives of the owners. We will discuss some the different goals and objectives that need to be considered before establishing a retirement plan or changing your current plan.
Goals and Objectives
The Goals and Objectives listed above are not an all-inclusive list; it is a starting place in helping you design a retirement plan for your company. You first want to make a list of goals and objectives in the order of importance to you and your company. You will want to discuss the goals and objectives with your financial advisor and your Third-Party Administrator (TPA) to help design your plan. Your goals and objectives may be reached with a single plan or a combination of more than one plan. Some of the types of plans to help you reach your goals and objectives are listed below:
Profit Sharing Plan
Profit Sharing plans are Defined Contribution (DC) plans that allow the employer to make contributions each year from 0% to 25% of eligible employee compensation. Profit Sharing plans offer many different contribution formulas to help achieve the goals and objectives of the company.
Traditional 401(k) Plan
The most popular DC plan is the traditional 401(k) plan that allows employees to make salary deferral contributions from their pay each pay period. These plans also allow employers to make profit sharing contributions based on the employee’s salary and/or matching contributions based on the employee’s salary deferral contributions. The amount Highly Compensated Employees (HCEs) may defer in a traditional 401(k) plan will be limited by the salary deferral percentage of the Non-Highly Compensated Employees (NHCEs). Many different profit sharing formulas are offered in 401(k) plans to help achieve the goals and objectives of the company.
Safe Harbor 401(k) Plan
A Safe Harbor 401(k) Plan is a version of the traditional 401(k) Plan that allows HCEs to defer the maximum amount allowed from their salary each year. These plans are deemed to pass certain nondiscrimination tests that normally limit the amount of salary deferrals by the HCEs in a traditional 401(k) plan. Safe Harbor 401(k) Plans require an employer contribution that is 100% vested and must be given to all eligible plan participants regardless of employment classification or the number of hours worked in the year.
Employee Stock Ownership Plan (ESOP)
The ESOP gives the owners of the company the option of having the employees purchase all or part of the company through the ESOP. The employees’ ownership in the company can help build loyalty and help retain valuable employees. The ESOP can also become a KSOP, which is an ESOP that offers the same features as a 401(k) plan. ESOP and KSOP plans allow employers to make contributions in employer stock and/or cash contributions each year.
Money Purchase Plan (MP)
Money Purchase plans are DC plans that guarantee a certain percentage of contribution each year based on the employee’s salary. These plans have lost popularity due to the fact that profit sharing plans can achieve the same results without the guaranteed contribution percentage each year.
Defined Benefit Plan (DB)
DB plans allow larger contributions for the HCEs and the NHCEs than the traditional DC plans. Before you establish a DB plan, you must understand that larger contributions will be required each plan year. The downside of the DB plan is that a large drop in the market value of the plan assets will result in a larger than anticipated employer contribution. Participants in DC plans know the value of their account each year but in a DB plan, the participant is given an estimated monthly benefit as of the plan’s normal retirement age.
Cash Balance Plan (CB)
A CB plan is a type of DB plan that offers a more stable annual contribution due to more conservative plan investments. The participants know the amount they will be entitled to at the end of each plan year.
The plan’s financial advisor and your TPA will help you design a plan or combination of plans to help reach your goals.