Time is Running out for the SIMPLE Retirement Option

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-

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. 

Cost:

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.    

 

401K 

Customization:

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. 

Contributions.

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.  

Cost:

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.   

Content may be re-distributed with reference and link.
 

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®).   

 

Retirement Planning Doesn’t Need To Be Scary

Retirement Planning is one of those things that everyone knows they should do, but many fall short in the taking action. This is usually because they simply don’t know where to start. That’s a reasonable concern, but it’s really just a matter of having a framework of understanding as to what comprehensive retirement planning entails.

There are six areas that we should all address:

Current Cash Flow

Money is the fuel that drives any economy, and your family finances is an economy, even if yours is a family of one. As you’ll see when you read on, retirement planning involves some commitment of funds. So the appropriate first step is to know where you’re starting from by creating a cash flow statement. This is simply a list of income sources and expenditures.

Debt Management

If your cash flow statement revealed that you have limited discretionary income, at least part of the problem is probably excessive debt. If that’s the case, don’t despair. With a plan, and a little discipline, you can pay down your debt much quicker than you might think. One great resource is PowerPay.org, a free website that was created by Utah State University to help debtors become savers.

Emergency Preparedness

Something that can get people in financial difficulty very quickly is the unexpected expense. Whether it’s the need for a new range, an emergency car repair, or some other large unexpected expense, these can be devastating unless they’re planned for. What that requires is the creation of an emergency fund that is set aside for the sole purpose of paying for unexpected necessities. A good rule of thumb is to have enough saved to cover six months of normal living expenses. And, when money is taken out to cover something, the fund should be replenished as quickly as possible.

Risk Protection

Most people have adequate risk protection (aka. insurance) on their house, car, and health – usually because they’re forced to by a lending institution or the government. But many people are not adequately covered for their life. Often that’s because they see life insurance as a way to leave their families rich in the event of their death. But that’s not how life insurance should be viewed. Rather, it should be viewed as a means to create a pot of money that will enable the surviving family to generate an ongoing income that replaces the income lost due to the death of a bread winner.

Savings and Investments

This is the fun part. This is where the steps designed to help get your financial house in order begin to pay dividends – literally. By implementing and following a customized savings and investment plan, you are creating a pot of money that will enable you to live the kind of retirement lifestyle you want off the interest earned by that pot of money.

Estate Preservation

This component is often overlooked by people planning for retirement. After all, if you’re leaving an estate, that means you’re dead and no longer need the money, right? But failing to adequately plan your estate will cause your heirs to have to pay a substantial percentage of whatever you leave to the I.R.S. Not a very attractive alternative, is it? The fact is, even if you think your estate will be modest, you should consult with an estate planning specialist. Not only can they help you avoid excessive estate taxes, they can also advise you on ways to grow your estate and maximize your monetary legacy.

How you might apply the steps we’ve discussed above will depend on your current age, and a variety of other factors. When creating your retirement plan, you should always seek the help of a qualified professional.

Why Do Women Trail Men in Retirement Planning?

It’s often said that women naturally put others first, which, admirable as it is, can become a problem in terms of their own financial future.  A new study by the ING Retirement Research Institute shows that women, on average, are much less prepared for retirement than men.  Fewer women have formal investment plans in place (only 25%); those that do have a retirement plan have over $40,000 less than their male counterparts in those savings plans.

There is no question that women need to do more in terms of saving for their retirement.  At ages 65 and older, the majority of women in today’s society are single, which means they need to have a plan for funding their retirement.  Before we can start to search for a solution, it’s important to pinpoint the causes.   What is holding women back?

We must start with the most obvious: women are oftentimes mothers.  Although times are changing and more women are heading out into the work world, the fact that the majority of households have women as the main caretakers for the children is a major obstacle in planning for retirement.  The study showed that women on average have $41,000 less in their retirement savings than men, with a $149,000 to $108,000 spread, but that gap gets even more significant when women have children at home.  That $41,000 disparity grows to $61,000 with those women having only $88,000 in their retirement savings accounts.  This number can be attributed to the fact that mother’s spend more of their working years as caregivers rather than breadwinners, which can lead to deficits in their earnings, savings, and Social Security.

Despite the fact that the gender wage gap is becoming smaller overtime, many women fail to capitalize on the skills that they bring to the work force.  These skills can often be a women’s greatest financial capital through her adult years.  Women often fail to see these skills, which makes them much less likely to negotiate for pay raises or benefit increases.  They also don’t take advantage of what their employers offer.  On average, only 65% of mothers are receiving their employer’s full company match while 76% of fathers are.  That is money waiting for women to reach up and grab, but 35% fail to make the stretch. The unfortunate truth is that only 35% of women have spent time thinking about their retirement, which is a big indicator as to their lag in savings.

Another reason many women are unprepared is that they simply don’t feel comfortable in the financial arena.  Financial Planning is a profession that is male-dominated, which leaves many women untrusting of those advisors.  66% of all women indicated they received their financial guidance from family members or friends.  Furthermore, trends show that women often prefer to get their information from sources where they can anonymously research and make decisions, such as blogs, websites, social media sites and so on.  While these sources are valuable assets, including a qualified advisor in retirement planning can help men and women navigate the complicated waters of investing.

One other issue that inhibits women from proper planning is their scope of the issue. Only 28% of women have calculated what their retirement will cost.  This follows the long standing stereotype that women avoid numbers and calculations.  Many times, when women hear about a 2% return annually on their investment, they don’t respond as enthusiastically.  If they change their vantage point to a more tangible result, such as an investment leading to their daughter avoiding student loans, they tend to be more interested in the planning.  Because of the limited and technical vantage point, many women find it easiest to simply avoid the issue altogether.

The hard truth is that women are saving less but living longer and, often times, are living their longer lives independent of men.  This lack of savings can lead to outliving their finances, the inability to afford long term care or burdening their children, all of which are major concerns on the minds of most women.  So it may seem that despite the money spent on cards and flowers this past Mother’s Day, the most valuable gift for these women is simply a conversation about their financial plans for the future.  It doesn’t look as pretty in a vase but it certainly will bloom for much longer.

Spending that Nest Egg Wisely in Retirement

It’s difficult enough to plan and save right for retirement, given today’s topsy-turvy financial markets. What’s more, it can be a bit of a puzzle in those Golden Years to come up with the right withdrawal plan. The idea, of course, is to find that balance between spending down a portfolio while maintaining the right asset allocation to capture future growth possibilities.

One method that investors often use for spending during retirement is the ‘bucket strategy.’ According to an overview in the American Association of Individual Investors (AAII), more than thirty-percent of financial professionals recommend this approach to their clients:

The ‘bucket strategy’ segments retirement assets by certain categories; generally based on the risk level of the assets and the needs or expenses these assets are expected to cover over the period of time in retirement when the assets are expected to generate income. With the help of a qualified financial advisor, the bucket approach can help bring that all-important sense of control to the investor’s concerns about having enough income during their lifetime.

A financial advisor can also help an investor assess their individual risk tolerance in handling the financial strains put on the portfolio during the market’s dips. Using a questionnaire that asks basic questions about risk preference, an advisor can determine an appropriate allocation given a client’s time horizon and other sources of income, such as pensions and social security.

Ultimately, no one strategy fits all investors. Consulting with a qualified advisor can help you develop a withdrawal plan that will keep you on your best path forward.

Be Financially Fit for Life

The world is exploding with products and services targeted to keep us physically fit— from phones that count our steps and track calories to armbands that monitor REM sleep. There are diets with no carbs, diets with juice and diets on a beach. It’s the same with your financial fitness. There are blogs, articles, tweets and posts claiming the next great fad will give you “all the income you’ll ever need”, or “make you rich overnight”. With so much information and misinformation out there, it can be confusing, but using three simple tips can help keep you financially and physically fit. Continue reading