There are two primary types of retirement plans that are most commonly used by small-to-mid-sized businesses. These Qualified Retirement Plans ("QRPs") can generally be classified as either "defined benefit" or "defined contribution" plans.
Defined Benefit (DB) plans
Defined Benefit plans define the benefit amount each participant will receive at retirement age and then estimate how much must be contributed each year. The amount of the contribution is generally determined by an actuary. Mortality and investment risks are borne by the employer.
Defined Contribution (DC) plans
Defined Contribution plans generally provide that a percentage of current salary be put into the plan each year. The amount at retirement will depend on the investment return and number of years until a participant retires. Mortality and investment risks are borne by the participant. For this reason, defined contribution plans have become the predominant plan over the past 15 years.What kind of plan is right for your business? The easiest way to tell is to look at the source of the contribution.
For a plan that only uses employer money, consider these options:
- MPP/PSP (Money Purchase Plans/Profit Sharing Plans)
- SEP-IRA (Simplified Employee Pensions).
SEP IRA let employers make direct, tax-deductible contributions to employee SEP-IRA accounts. Small business owners and their employees who want the opportunity to enjoy a comfortable retirement can find many benefits in the SEP's flexible, low-cost and easy to manage program.
For a plan that uses employee and employer money, consider these options:
- a 401(k) Plan
- SIMPLE-IRA (Savings Incentive Match Plan for Employees).
The SIMPLE-IRA is another account specifically designed for small businesses. It features tax-deductible contributions and tax-deferred growth and is meant for businesses with fewer than 100 employees.
Please note: certain non-traditional alternatives are also available, which may have particular appeal in certain circumstances. A Foresters Financial advisor can meet with you to answer any questions you might have about retirement plan options.