Retirement Plan Options for Small Business Owners

by | Oct 7, 2019 | Financial Planning

When it comes to retirement plans, we often think of a 401(k) or 403(b), depending on what type of workplace we are accustomed to. These options work very well for large business, but there are quite a few different options to be explored for smaller business owners. This can be a very large decision based on how large or small your business is, and what you are looking for when saving for your future and helping those that work for you save for theirs. There are also a couple of ways to maximize saving opportunities for business owners and their more highly compensated employees.

Business owners have a lot of responsibility when it comes to offering options for their employees. Saving for retirement is essential to securing retirement needs for all individuals. The Department of Labor established The Employee Retirement Income Security Act of 1974 (ERISA) that set minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans. Over the years this act has expanded in its scope to try to better protect participants.

Fiduciary. There are fiduciary responsibilities for the employer when it comes to managing and controlling assets in these plans. Investopedia defines a fiduciary as a person or organization that acts on behalf of another person or persons to manage assets. Essentially, a fiduciary owes to that other entity the duties of good faith and trust or to act in the best interest of the individual for whom they are controlling assets. The employer can maintain these responsibilities or they can shift them to an investment manager, such as a Registered Investment Advisory, that has a fiduciary duty to all clients they serve. A broker-dealer is not held to this type of standard.

There are three primary types of retirement plans employers may offer:

  1. IRA-Based Plans. The amount of money that an individual receives at retirement depends on the funding of the IRA and the earnings (or losses) on those funds.
  2. Defined Contribution Plans. At retirement, an employee receives the accumulated contributions plus earnings (or minus losses) on the invested contributions.
  3. Defined Benefit Plans. Primarily funded by employer, at retirement an employee receives a specified benefit promised by the employer. A defined benefit plan includes cash balance plans.