Retirement plans: looking beyond the 401(k)
For years, a 401(k) plan has been a benefit that many employers have used to attract and retain good employees.
However, 401(k) plans can be limited by IRS contribution rules for higher-level employees and fall short of their goal to attract and retain key employees. In a low unemployment rate environment, this has forced many employers to look at other benefit options when considering their overall compensation package.
Depending on the employer's strategic goal, there are several other types of benefit plans to consider beyond a 401(k) plan. Some alternative plan types for employers to consider follow.
Profit Sharing Plan
Often used in conjunction with a 401(k) plan, a profit sharing plan is a flexible option that allows an employer to contribute more to their employee's retirement account beyond an employer match. An employer can contribute the same percentage of salary to all employees or design the plan to benefit certain groups of employees.
Although a flexible option for employers, a profit sharing plan does have its limitations. It follows the same annual defined contribution limit as a 401(k) plan ($56,000 for 2019), which includes employee, employer match and profit sharing contributions. Therefore, the impact to higher compensated employees can be limited.
Cash Balance Pension Plan
Increasing in popularity during the past 10 years or so, a cash balance pension plan incorporates elements from traditional defined benefit plans along with the flexibility of a defined contribution plan. These hybrid plans provide high-income owners and partners the ability to save much higher amounts annually based on employee demographics and plan design. Often combined with another type of defined contribution plan, this combination allows employers to maximize contributions for the benefit of the business owner(s), while also helping to attract and retain key employees.
Keep in mind that size often matters with cash balance plans. In fact, companies with 100 employees or less represent more than 90 percent of all cash balance pension plans. Although a cash balance plan can offer a unique addition to an employer's benefit package, it can add complexity and increased cost. Engaging a qualified adviser and third-party actuary to design a plan that meets the employer's needs is highly recommended.
Employee Stock Ownership Plan
An employee stock ownership plan often is used to provide ownership transfer from a departing owner. However, an ESOP also can serve as a supplemental employee benefit plan when used in conjunction with another type of retirement plan. Employers can choose to match employee savings with company stock from an ESOP as an added benefit or as an alternative to matching employee savings with cash. A sense of ownership in a company can lead to increased loyalty and productivity from employees since they have an increased financial stake in the company.
An ESOP is not for every type of company, however. Suitable companies for an ESOP should have strong financial performance with a supportive employee culture in order for the benefit plan to provide the desired outcome.
Nonqualified Deferred Compensation Plans
Unlike the qualified plans mentioned above, nonqualified deferred compensation plans are not limited by the same non-discrimination rules. This makes NQDC plans a viable option for employers looking to supplement existing qualified plans and provide an extra benefit to key employees and highly compensated employees. In essence, a NQDC plan is a contractual agreement that participants of the plan will be paid in a future year (i.e. retirement) for service rendered in the current year. This makes the plan a benefit for retaining key employees.
There are many factors to consider when selecting a benefit plan to meet your organization's strategic needs. Consider consulting a qualified adviser to discuss the strategies mentioned here. Every employer's circumstances vary widely so it is critical that you work with a professional who has knowledge of your specific goals and situation.
This article was written by Brent Hulbert from Telegraph - Herald; Dubuque, Iowa and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to [email protected].
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