Time is Running out for the SIMPLE Retirement Option
Are you considering starting a retirement plan for your small business? Have under 100 people and want to make it easier to get them enrolled? Then you only have a couple of days left to establish your SIMPLE Retirement plan. They must be established by October 1.
When people think of retirement plans, they almost always focus on 401(k)s. We think the choice for many small businesses is really between a 401k account and a SIMPLE IRA. We wanted to create a mini primer on some of the differences between the two plans.
The SIMPLE IRA is the easiest from an administrative perspective, but all contributions are 100% vested as soon as employees contribute. This makes it more of an employee benefit and less for employee retention. The 401k has more administrative expense, but has flexibility in the amount, timing and nature of the contributions. You can also have the employer contributions vest over a number of years (For example, 20% every year you work there…)
For the SIMPLE IRA
Contributions can be either 2% for everyone regardless of employee contribution or a 3% match. Sample on employee with $100,000 in income. If you selected 2%, they get $2,000 regardless of their participation. On the Match, they get $3,000 but only if they also contribute $3,000. I have seen more success with plans where employees need to participate in order to get a contribution. Focuses the benefit on the employees that understand the contribution as a benefit. Maximum Employee Deferrals would be $12,500/year. If over 50 years old, they can also contribute an additional $3,000.
To calculate your maximum company match, just multiply your payroll by either 2% or 3%.
You can also set eligibility requirements. You can be as strict as an employee must be with you for 2 years and make at least $5,000/year before they are eligible. Most common would be employees eligible after the first year. There isn’t much else available in terms of customization and you need to have fewer than 100 people to participate.
You have a lot of flexibility when it comes to providers and Cost. You can Hire a Registered Investment Advisory firm to conduct in person enrollment and offer ongoing education and investment management or you can work directly with a fund provider. Think of the fees like layers and make sure you understand the fees at each layer and the services that will be provided.
Layer 1. Tax filing and Administration: Good news here. Generally, there is no cost. You want to make sure and establish a proto-type plan document, establish written authorization to deduct from employee’s paychecks…but you generally don’t need a lot of professional help. If you are the owner, you will want help calculating your maximum contribution, but this is generally in the realm of your CPA.
Layer 2 The investments: The Funds themselves have an annual expense ratio. This is the percentage of the fund that is being used to manage the funds. When you look at returns, they are generally referenced after this cost has been taken into account.
Layer 3 Custody: The funds need to be held somewhere and the company responsible for this is the custodian. Some charge an IRA custodial Fee, usually flat rate per account or per fund. Some also charge for transaction charges as a percentage of the account balance or per trade. Employers have the ability to pay for many of the costs at this level.
Layer 3 Investment Management: When you want to give your employees the option of using a professional investment advisory firm to help allocate, manage and report on their accounts. This often starts with an enrollment meeting and continues to establish an investment objective and manage accounts to conform to that objective. Fees are either flat rate or expressed as a percentage of assets under management. Be sure to find out how much employee education and financial planning is available at this level. The employer can pay for the fees at this level as well.
Layer 4 Employee Education and Financial Planning: Many companies are not just offering these benefits, but ensuring that their employees have the resources to use them. This can be in the form of Employee enrollment meetings, or one on one financial planning discussions. This is generally either included in the investment management or defined in a separate consulting agreement based on a flat rate package or hourly commitment. To get the most use out of your plan, don’t overlook the importance of educating and motivating your employees to take control of their own future.
There is a lot of customization available at the 401k level. You can do flat contributions, matching contributions and profit sharing contributions. You can set eligibility requirements similar to the SIMPLE, but you can also set vesting requirements. Sample 6 year vesting requirement would be 0% the first year, followed by 20%, 40%, 60%, 80%, 100%. You can always chose something less restrictive as well. You can even set your plan up so employees have to Opt-out instead of opt in.
Employees can defer up to $18,000 of their salary pre-tax plus an additional $6,000 if over the age of 50. Employee match depends greatly on customization options.
Since there is so much customization available, there are testing requirements and IRS filing requirements every year. A Sample plan would include the following costs: I won’t go into too much detail repeating above.
Layer 1. Tax filing and Administration: You will need a recordkeeper to make sure and keep accounts separated and a Third-party administrator to ensure testing, compliance and reporting. There is usually a flat rate cost plus a certain dollar amount per participant. The larger the plan, the costlier.
Layer 2 The Investments: This is the same as in the SIMPLE. Make sure you are paying attention to the share class. Some funds are offered at multiple cost ranges. You want to see if you have access to the lowest cost institutional share. Some providers obscure some of their costs in the expense ratio. Hypothetically, you might have a Fund with an R2, R3, R4, R5, or R6 designation or N, L, G lettering. Cost differences between the share class may exceed 1% so make sure you are getting the lowest cost share for your plan.
Layer 3 Custody: The funds need to be held somewhere and the company responsible for this is the custodian. Most custodians will offer funds from multiple fund families and make it reasonably easy to change them. You may also want a self-directed brokerage component for some employees.
Layer 3 Investment Management: When you think of Investment management for your plan, it can be at the plan level or the employee level. Minimally, the plan level should have an investment policy statement in place documenting the investment process for selecting and if need be, replacing the investment line up. At the participant level, you can also set up models that can be managed by a professional and eligible as “one size” investment options for employees. Most of these are generally offered as a % of the funds being managed though you may encounter minimums if you are starting a plan up from scratch.
Layer 4 Employee Education and Financial Planning: Same as the SIMPLE. Consider an employee education plan to address not just Investment management, but budgeting and use of credit.
So there are Many choices . For more detail, check out the IRS Website on SIMPLE IRAs https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan or 401K plans https://www.irs.gov/retirement-plans/401k-plans or contact a qualified Financial Advisor or CPA.
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About the Author
Ben Rickey is co-Owner of Leonard Rickey Investment Advisors PLLC. www.bestpathforward.com Their practice focuses on family businesses. He holds the Certified Financial Planner(CFP®) , the Certified Investment Management Analyst(CIMA®), and the Certified Private Wealth Advisor Designations(CPWA®).