May is Older Americans Month. The 2018 theme is "Engage at Every Age." While that can certainly mean remaining employed past retirement age, chances are your workers would prefer employee retirement funding that gives them the choice to stop working when the time comes.
According to the 2017 Retirement Confidence Survey (RCS), which polled 1,671 U.S. individuals 25 and older, three in 10 people stated they feel mentally or emotionally stressed about preparing for retirement. Another three in 10 reported worrying about finances at work, and more than half (52 percent) said that retirement planning programs would be helpful in increasing their work productivity.
"One of the main reasons people work is to provide for stable financial lives for themselves and their families," says Marianela Collado, CEO and senior financial advisor for Tobias Financial Advisors. "Financially secure employees make for happy employees, which yields better results for the company."
Encouraging Employee Retirement
Collado's company works with clients on two ends of the spectrum—those nearing retirement and realizing they haven't saved enough and those just entering the workforce and stressing about making ends meet.
"We tell clients and our employees that doing something in terms of planning for employee retirement is better than doing nothing," she says.
—Beau Henderson, retirement consultant
Being proactive about retirement planning is preferred over inaction, agrees Larry Ynman, owner of SOGO Wealth & Risk Management and past president of the National Association of Insurance & Financial Advisors (NAIFA).
"Educating employees to start a retirement account with any amount is something we work to achieve," says Ynman. "At our firm, we have monthly updates for employees about the status of their retirement programs."
Collado and Ynman are definitely on to something. The RCS found that retirement confidence was tied into retirement plan participation. Those participating in a retirement plan were markedly more confident that retirement would be comfortable.
Employee Retirement Options
It used to be that many companies—especially larger ones—offered employee Defined Benefit Pension Plans. But such plans have steadily declined within the private sector in recent years.
"With the decrease in pension plans and the increase in longevity, employee retirement is more challenging than it has ever been, but there are options for you and your employees," says retirement consultant, Beau Henderson, author of The 12 Steps to a Successful Retirement.
Simplified Employee Pension Plan (SEP IRA)
A Simplified Employee Pension (SEP) plan gives a business owner the opportunity to contribute to his or her own retirement and that of employees'. The business owner contributes each year to traditional SEP IRAs that have been set up for each employee. Contributions can be for up to 25 percent of each participant's pay.
A SEP has no setup fees or operating costs like conventional retirement plans. This option is available to businesses of any size. Employees are 100 percent vested and have ownership of all the money in their SEPs.
SIMPLE IRA Plan
Dean Catino, president and co-founder of Monument Wealth Management, has found that a SIMPLE IRA Plan, which encourages employees to participate and contribute, is the best option for his company.
"We offer a SIMPLE Plan to all employees with a three percent company match," he says.
A SIMPLE IRA Plan (Savings Incentive Match Plan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees. This plan is ideal for companies with 100 or fewer employees. It's inexpensive and easy to set up and operate.
The employer must contribute each year to the SIMPLE IRA plan, either by matching contributions up to three percent of compensation, or through a two percent non-elective contribution for each eligible employee. With the latter contribution type, employees receive an employer contribution, even if they don't contribute. Workers are always 100 percent vested.
Designated ROTH 401(k)
A designated Roth 401(k) is an account set up by the employer that holds after tax contributions. The employer must keep separate accounting records for all activity in the account.
This employee retirement option allows employees to save up to $18,500 in 2018, with an additional $6,000 for those 50 and older. Contribution withdrawals aren't taxed as long as the withdrawal is a qualified distribution. Henderson recommends this option.
"By building a substantial nest egg in a Roth 401(k), employees are also able to protect themselves from one of the biggest potential retirement risks—future tax increases," he says.
Defined Benefit Pension Plan
"My employees don't have to contribute even a penny to the plan," says Chu. "I make 100 percent of the contributions toward their employee retirement while contributing to mine."
The catch, according to Chu, is that employees must stay employed for at least 24 months.
"The plan is tied to company profits and essentially works like a 'stock option,'" says Chu. "The more the company makes, the more the employees are eligible to receive. It's expensive to manage for the business owner, but I've found employees appreciate the plan—especially during a good year when they're pleasantly shocked by how much money they get."
A Defined Benefit Pension Plan can be a good employee retirement option for some companies, believes Steven Trytten, a trusts and estates lawyer who is also a CPA.
"A Defined Benefit Pension Plan allows much larger contributions for older participants," he says. "Before deciding on such a plan, the business owner will want to evaluate how much he or she can contribute personally and compare that to how much he or she must contribute for employees."
When Employees Fail to Contribute
Whether they're living paycheck to paycheck or simply not thinking of retirement, it often happens that employees simply don't contribute to their employee retirement accounts when it's possible to do so.
"We've found that many employees, regardless of what you do or say, don't invest," says Scott Eichler, vice president of institutional wealth management at Newport Wealth Advisors and author of Don't Play Chicken with Your Nest Egg. His primary job is crafting retirement plans for small businesses and their owners.
"If employees don't invest, the employee retirement plan is simply an additional cost for the employer," continues Eichler. "I suggest creating an auto contribution with step-ups over a three- to five-year period. The default setting is that the employee contributes and has to be proactive to stop contributing. We typically start at one percent and add another one percent every year until the employee is receiving a full employer match."
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