Choosing A Retirement Plan for Your Small Business

According to a Fidelity Investments survey of businesses with 5 to 50 employees, 80 percent of small business owners believe it is important to help employees save for retirement, and more than 70 percent believe a retirement plan helps to attract and maintain valuable employees. Why then, do only 35 percent of those surveyed offer an employer-sponsored retirement plan to employees? New, simpler and more flexible choices may well increase that percentage.

Understanding the Options

A retirement plan benefits you and your employees. It can help your employees save for retirement, allow earnings to grow tax-deferred until withdrawn, better position your company to attract and keep the best employees and provide you the benefit of significant tax advantages through deductible contributions made on behalf of your employees. While there are a number of retirement plans designed specifically for self-employed individuals and small business owners, the plans fall into two general categories:

1) Plans generally funded by employer contributions such as a SEP-IRA or a Keogh, where the employer contributes the same percentage of each participant's compensation as the employer contributes to his or her own plan

2) Plans generally funded by employee salary deferrals and employer contributions like the SIMPLE-IRA or a 401(k), where employees have an opportunity to defer part of their salary on a pre-tax basis and employers make contributions based on a percentage of each employee's compensation.

Here are four major retirement plan options available to small businesses and the self-employed:

SEP-IRA: Designed for self-employed people and small business owners, a SEP-IRA is funded solely by employer contributions to each employee's SEP-IRA. Annual contributions can be made of up to 15 percent of compensation, up to $24,000 per participant for 1997.

Key Advantage: Easy to set up and maintain.

Keogh: Generally funded with employer contributions, Keogh plans may be of interest to those who would like to contribute more to their retirement plan than a SEP-IRA allows. Generally, up to 25 percent of compensation, $30,000 per participant can be contributed each year.

Key Advantage: Higher contribution maximums.

SIMPLE-IRA: Introduced Jan. 1, 1997, the new Savings Incentive Match Plan for Employees is specifically for companies with 100 or fewer eligible employees. Employees can elect to defer up to 100 percent of their compensation on a pre-tax basis each year, up to $6,000 as adjusted for cost of living.

The employer must either match each participant's contribution dollar-for-dollar, up to 3 percent of compensation, (which can be reduced to 1 percent match in any 2 out of 5 years); or contribute 2 percent of each eligible employee's compensation, up to $3,200, regardless of whether the employee contributes or not. All employer contributions and employee salary deferrals are tax-deductible as a business expense.

Key Advantage: Salary reduction with less administration.

401(k): Because a 401(k) plan offers more features but also requires more administrative responsibilities and higher costs, it's generally more appropriate for companies with more than 25 employees.

In a 401(k) plan, employees can save for their own retirement by deferring a portion of their salary to their retirement plan on a pre-tax basis. Depending on plan design, employees can elect to defer as much as 20 percent of their compensation up to an annual maximum of $9,500 as indexed for cost of living. Employer contributions are optional, although many employers do match some percentage to encourage participation.

Key Advantage: Vesting schedules, loans and flexibility in employer contributions.

Deciding which plan is right for you

There are a few key questions to consider when determining which retirement plan is most appropriate for your business:

1) Do you want a plan that is solely employer funded or one that is funded by employer and employee contributions?

2) What percentage of compensation do you and your employees want to be able to contribute each year?

3) How much does each plan require you to contribute on behalf of your employees?

4) Are you willing to assume some additional administrative responsibilities and costs in exchange for more flexibility and additional features?

Many small businesses may not offer a retirement plan simply because they are not aware of the available options. It's important for you to find out which retirement plan may be right for your business.

Steve Tradd is vice president and branch manager of Fidelity Investments Naples Investor Center, a multi-service discount brokerage operation located at 4001 Tamiami Trail North. Call (941) 649-8885 for more information.