Forex Articles

The widespread elimination of traditional pension plans and defined benefit plans has created a greater need for individuals to take responsibility for their own retirement savings. Setting aside enough money for retirement income needs can present a challenge to some individuals, as personal contribution limits on individual accounts, such as an individual savings accounts (IRA) or Roth IRA, are relatively low. Additionally, IRAs, certificates of deposit (CDs) and nonqualified investment accounts lack the level of tax benefits provided by accounts specifically earmarked for retirement. This is due to a dilution in compound interest each year because gains in nonqualified, or nonretirement, accounts are taxable in the year they are realized. While saving for retirement seems as though it is an uphill battle, employers have an opportunity to assist employees in reaching their long-term financial objectives.

A retirement savings plan, such as a 401(k), is one of the myriad of fringe benefits commonly offered to employees. More large-, mid- and small-sized companies understand the importance of offering an additional method that allows employees the ability to set aside funds for retirement planning needs. Through personal contributions to qualified plans, employees have an enhanced opportunity to take ownership of their own retirement savings. At the same time, businesses offering a 401(k) have the potential to reap long-term rewards in a variety of forms. The benefits inherent to offering a 401(k) plan to employees include tax savings for the business, recruitment and retention of highly qualified employees, greater incentive for business owner retirement savings, and affordability and ease of ongoing maintenance.

Establishing a 401(k) plan for employees is one way to create additional tax savings for a small business. The startup costs associated with offering a retirement savings plan are often viewed as a barrier for small businesses, especially when the business is in its first few years of operation, during which time cash flow may be a valid concern. However, a tax credit established under the Economic Growth and Tax Relief and Reconciliation Act (EGTRRA) is intended to reduce the burden of plan expenses and employee education. The tax credit is available for small businesses with fewer than 100 employees, and it equals 50% of the cost to establish and administer a 401(k) or other qualified retirement savings plan, up to a maximum of $500 per year for the first three years the plan is in effect. The tax credit is most often used in the year the plan is established, but it may be used to reduce tax liability in the year prior to the plan being implemented.

In addition to the EGTRRA tax credit, employers are also allowed to claim a deduction on any matching contributions added to the plan, up to applicable limits. If employees are making personal contributions to the 401(k) and effectively reducing their taxable income, a business may also experience a reduction in payroll taxes due each year. The combined tax benefits of the startup tax credit and the deduction available on company contributions represents a potentially substantial tax savings for small businesses.

Another benefit inherent to establishing a 401(k) is the ability to recruit top talent. Candidates for highly skilled positions often receive multiple offers from a wide range of companies in the same industry. In addition to company culture and annual salary, ancillary benefits such as a 401(k) with an employer match are a sticking point with potential employees because conventional pension plans are becoming obsolete. A company that does not offer a retirement savings plan may not be as well positioned, or even considered by highly qualified candidates, as competing companies that offer retirement savings plans.

Similarly, offering a 401(k) plan to current employees is a method of securing greater retention and a way to boost employee morale among current workers. Employees feel more connected to their workplace when a retirement savings plan and other fringe benefits are made available, and that connection results in long-term satisfaction on the job. Businesses that maintain a roster of qualified and content employees spend less capital on recruiting, training and the lagging productivity often associated with high employee turnover rates.

Another perk to establishing a 401(k) plan is the ability business owners have to shore up their own retirement savings. It is typical for small business owners to focus on investing back into business operations, often to the detriment of personal savings and investment. Creating a retirement plan through the business provides a greater incentive to set aside money for the long-term because of the numerous benefits it provides directly to the business and its employees. Owners are able to save up to the annual contribution limits each year, in addition to any matching contributions applied by the company. These contributions can be diversified among various securities within a 401(k), and they grow on a tax-deferred basis until funds are withdrawn in retirement years.

As traditional pension plans have faded into the background, retirement savings plans have become more popular among small businesses, making them more affordable to business owners. Numerous options are available from 401(k) plan providers and administrators, from Web-based platforms to full advisor-supported plans. A simple Web-based 401(k) plan can cost as little as $1,200 per year to establish and maintain, and employees and business owners can easily access account information such as contribution percentage, investment allocation and general financial planning information any time they need or want through the Internet. For more complex plans, or those that include a financial advisor or team of advisors to meet with and educate employees and owners on plan options, expenses are often higher on an annual basis. However, advisor-supported plans often include additional benefits for employees in terms of personal financial planning services, investment allocation assistance, and distribution or roll-over education and assistance.

Establishing and maintaining a 401(k) plan is a simple process through most plan providers and administrators. Minimal paperwork is required to establish a plan, and employees and owners are able to select contribution amounts and investment options by completing a brief enrollment form. IRS reporting requirements for 401(k) plans are often handled through the plan provider or administrator, keeping the time and effort commitment from the business owner minimal. Companies also have flexibility in determining a vesting schedule for matching contributions, level of matching, if any, and eligibility of full- and part-time workers as long as certain guidelines are met.