How to create a retirement benefit plan

As your company grows, providing a comprehensive and competitive benefits package becomes more important. A retirement benefit plan can help you recruit great candidates and gain a competitive edge. Here’s some advice for getting your first retirement benefit plan off the ground:

Determine the best retirement benefit plan for your company and employees

In the United States, there are two primary options for retirement benefit plans:

• A defined retirement benefit plan
  • Funded by the employer.
  • Promises employees a specific monthly benefit at retirement.
  • Often calculates employee benefits based on tenure at the company and age at retirement. Pension benefits will equal a percentage of an employee’s income at a designated time.

• A defined contribution plan
  • Does not promise employees a specific benefit amount at retirement.
  • Employers and employees contribute money to the employee’s individual account in the plan.
  • In many cases, employees are responsible for choosing how these contributions are invested, and deciding how much to contribute from their paycheck through pre-tax deductions.
  • Employers may add to employees’ accounts, in some cases by matching a certain percentage of employees’ contributions.
  • The value of an account depends on how much is contributed and how well investments perform.
  • At retirement, employees receive the balance in their account, reflecting the contributions, investment gains or losses and any fees charged against their account.

Is a 401(k) plan right for your company?

A 401(k) plan is a popular type of defined contribution retirement benefit plan. There are four types of 401(k) plans:

• Traditional 401(k)
  • A 401(k) is a qualified profit-sharing plan for employees to contribute a portion of their salary to individual retirement accounts.
  • Elective salary deferrals are excluded from enrolled employees’ taxable income (except for designated Roth deferrals.)
  • Employers can contribute to employees’ accounts.
  • Distributions and earnings are included in employees’ taxable income.

•  Safe harbor 401(k)
  • A safe harbor 401(k) plan is similar to a traditional plan. However, it provides for employer contributions that are fully vested at the time they are contributed.
  • These contributions may be employer matching contributions. They also may be contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals.
  • Safe harbor 401(k) plans are not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans.
  • Employers sponsoring safe harbor 401(k) plans must satisfy certain requirements regarding minimum and maximum contributions.

•  SIMPLE 401(k)
  • SIMPLE stands for “Savings Incentive Match Plan For Employees Of Small Employers.”
  • This type of 401(k) plan is available to employers with 100 or fewer employees who received at least $5,000 in compensation from their employer during the preceding calendar year.
  • SIMPLE 401(k) plans are not subject to the annual nondiscrimination tests that apply to traditional 401(k) plans.
  • Employers are required to make contributions that are fully vested.
  • Employees who are eligible to participate in a SIMPLE 401(k) plan may not receive any contributions or benefit accruals under any other plans offered by their employer.

•  An automatic enrollment 401(k) plan
  • An automatic enrollment feature allows employers to automatically deduct a fixed percentage or amount from their employees’ wages to contribute to a 401(k) plan, unless employees intentionally opt out.
  • These contributions qualify as elective deferrals. Many companies use this model to increase participation in their 401(k) plans.

• A SIMPLE IRA plan, Simplified Employee Pension plan (SEP), employee stock ownership plan (ESOP) or profit sharing plan are other examples of defined contribution retirement benefit plans.

Who will your retirement benefit plan cover?

• Typically, retirement benefit plans cover full-time employees. Full-time employees are usually considered employees who work 40 or more hours per week. The exact distinction between full and part-time employees is left to the discretion of the company. However, in order to remain competitive, retirement benefits should be, at minimum, offered to full-time employees.
• Part-time employees are often not covered under an employer’s retirement benefit plan, or are only covered with minimal benefits. However, if a part-time employee works more than 1000 hours a year they must be included in your plan, according to the Employee Retirement Income Security Act (ERISA). Competitive retirement plans offer full or limited retirement options to part-time employees.
• Union employees may have part or all of their retirement benefits covered by a union-sponsored 401(k) or other retirement account. Working with a union representative will help you support union employees’ retirement needs.

Create a summary plan description

When your employees enroll in your retirement plan, ERISA requires you to provide a summary of benefits to your employees. According to IRS.gov, you should include the following in your summary plan description:

• Name and type of plan.
• Plan’s requirements regarding eligibility.
• Description of benefits and when participants have a right to those benefits.
• Statement that the plan is maintained pursuant to a collective bargaining agreement, if applicable.
• Statement about whether the plan is covered by termination insurance from the Pension Benefit Guaranty Corporation.
• Source of contributions to the plan and the methods used to calculate the amount of contributions.
• Provisions governing termination of the plan.
• Procedures regarding claims for benefits and remedies for disputing denied claims.
• Statement of rights available to plan participants under ERISA.

Related: How to include employee perks in benefits in your employee handbook

Make your retirement plan competitive

Even if you can’t match the best retirement options available, adding retirement benefits will encourage your employees to invest in their future.

• Generous matching: some of the most competitive 401(k) plans provide 100 percent matching up to five, or even six, percent of an employee’s income.
• Immediate eligibility: companies where employees don’t have to bank a certain number of years before enrolling in a plan will encourage new employees to start saving.
• Immediate or quick vesting: though an employee’s contributions to their plan are always 100% vested, or owned, by the employee, employer contributions only have to be fully vested by the time the employee reaches retirement age. By providing contributions that vest quicker, combined with matching, your plan will be more attractive to employees. Quick vesting plans provide a competitive recruiting edge.

Incentivize your employees to save for retirement

If a high percentage of your employees participate in a retirement savings plan, if reflects well on you as an employer. Consider implementing incentives to encourage employees to contribute to a retirement plan. Incentives could include:

• High contribution limits: allow your employees to contribute as much as they can to begin saving quickly and see their early investments pay off. Allow employees over 50 to contribute larger sums.
• Debt relief programs: many employees come to companies with student, credit card or other debts that they prioritize over saving for retirement. If you’re able to offer a debt relief or student loan repayment service, like Fidelity does, you’ll gain a competitive edge for recruiting highly-educated employees.
• Resources and advice: by bringing in a financial planner for your employees to meet with and determine their retirement plan, you show that you’re invested in your employees’ futures. That’s never a bad HR or recruiting move.

Consider international retirement plans

Retirement plans and options vary internationally. Many countries offer earlier retirement ages and use pension programs instead of benefit or contribution plans. To tailor your retirement benefits for your international employees, be sure to research the specific laws and options available in their respective countries. Here are some resources for more information:

• Factbox: Legal conditions for retirement in Europe (Reuters)
• Guide to Social Security and Retirement in Mexico (North American Agreement on Labor Cooperation)
• Canada Pension Plan – Overview (Government of Canada)