Key Factors Affecting Plan Selection for Businesses

Question 1

Whose goals and desires for the retirement plan MOST important in factoring what type of plan will be offered?

Answer 1

The business owner’s

Question 2

Six factors unique to each business owner that should be considered by the business owner and financial planner

Answer 2

1. What can the business afford to pay toward retirement
2. Who does the business owner want to target with plan benefits
3. Who is reponsible to fund retirement, the businesss or employee?
4. What level of protections are desired for the retirement plan assets
5. What level of admin burden and expenses is the business willing to tolerate
6. Are the employees capable of managing their own retirement savings plan

Question 3

Employee Census includes what? And why is it important?

Answer 3

• Important because:
  
  • It helps with retirement plan selection and
  • For compliance testing
• Includes:
  
  • Age
  • compensation
  • ownership in the company (key employees and HCE)
  • time with company
  • breakdown of key and HCE employees
  • average of of key employees versus nonkey employees

Question 4

What can the business afford to pay toward retirement - appropriate plans

Answer 4

• Narrows down plan selection to pension plans, profit sharing plans, SEP or SIMPLE IRAs
• Mandatory contributions regardless of company financial position are consistent with pension plans
• Flexible contributions, but substantial and recurring are consistent with profit sharing plans
• SEP IRAs offer most flexible setup and contribution calendar with plan not needing to be established or funded until tax return deadline, including extensions

Question 5

Who does the business owner want to targer with plan benefits? - Appropriate plans

Answer 5

• If goal is to provide larger benefits for business owner and key employees, workforce makeup is a key factor:
  
  • If there are significant age and compensation differences between key employees and the rest of the workforce, these are appropriate:
    
    • Defined benefit and target benefit, if compnay can afford
    • Integrated, age-weighted, and new comparability profit sharing plans could be considered
    • if turnover is high, SEP IRAs may be attractive
• If goal is to benefit all empoyees, including key employees, these plans would be most effective or a combo of these plans:
  
  • Pension plans, if business can afford it
  • Profit sharing plans
  • 401k plan with safe harbor features
  • SEP or SIMPLE IRAs
• Plans that cover the larger segments of the workforce will have the highest cost in terms of required contributions for the business owner

Question 6

Who is reponsible to fund retiremetn, the business or employee? - Appropriate plans

Answer 6

• If business feels strong responsibilty to fund employees’ retiremetn savings:
  
  • Pension plans, if business can afford it
  • Profit sharing plans such as profit sharing, ESOP, stock bonus
  • SEP IRAs
• If employee are responsible:
  
  • 401k and thrift savings plans
  • SIMPLE IRAs

Question 7

What types of protection are desired for retirement plan assets? - Appropriate plans

Answer 7

• Qualified plans if ERISA protection is desired
• Remember that IRAs do have some protection from creditors

Question 8

What level of admin burden and expense is business wiling to tolerate?

Answer 8

• Minimum burden would be with SEP IRA and SIMPLE IRA plans
• Safe harbor 401k profit sharing plans are generally low-cost, low-admin plans
• Pension plans, stock bonus plans, and plans that require cross-testing and other nondisrcimination testing are more burdensome and expensive to operate

Question 9

Are employees capable of managing their own retirement savings plans? - Appropriate plans

Answer 9

• Qualified plans using plan defaults and limited investmnet selections, or outright control over investment decision, as with certain pensino plans, provide business owners greater control over how employees invest their retirement savings
• Opportunities for a diversified portofilio must be provided