Small Business Retirement Plans

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Finding it hard to hire employees for your small business? Maybe the problem is your retirement plan. If it stinks, or you don't have one at all, savvy employees are unlikely to want to work for you.

So, where do you start? Here is a rundown of your retirement plan options based on 2005 requirements. The best plan will vary depending upon your needs.

Simplified Employee Pension Plan (SEP IRA)
If you have just a handful of employees and are looking for a plan that is truly low cost and low maintenance, then consider a SEP IRA. The plan is funded with tax-deductible employer contributions, and you must cover all eligible employees. Employee contributions are not allowed.

With a SEP there is no "plan document," and you don't need to file annual reports with the IRS. Contributions can vary from year to year. So if you hit a lean spell, you aren't locked in.

Savings Incentive Match Plan for Employees (SIMPLE IRA)
SIMPLE IRAs are good for your employees. They allow employee contributions. And, they mandate an employer match. Trouble is, a SIMPLE IRA won't let you sock away as much for yourself. For 2005, annual contributions are generally limited to $10,000 ($12,000 if you are 50 or older as of 12/31/05) plus an employer matching contribution (up to 3% of your salary).

"If you have a business with less than 10 people, then a SIMPLE IRA is a great way to get started," says David Wray, president of the Profit Sharing/401(k) Council.

Whatever you do, don't get the SIMPLE IRA confused with its similar but flawed cousin, the SIMPLE 401(k). This retirement option is like a traditional 401(k) except it typically has higher fees and less flexibility. "When we studied this option, we could not come up with a scenario where this would make sense to use," says Jeanette LeBlanc, marketing manager at T. Rowe Price.

Profit Sharing Plans
As you might imagine, a profit sharing plan gives you a slice of your company's profits. Annual contributions are made to your account, but because they are based on your company's performance, they'll likely vary from year to year.

401(k)
Think your business is too small for a 401(k)? Think again. If you have more than 25 employees, then you might be surprised to find that a 401(k) is not as expensive to create and maintain as you may have thought. "Due to the competitiveness amongst 401(k) providers, the price point continues to drop," says Guy Patton, senior vice president of emerging corporate markets at Fidelity. For example, Fidelity now offers a 401(k) package for businesses with 25 employees or less that costs $1,400 per year in annual fees, plus $28 per employee. Of course, this plan has limited flexibility -- you're going to pay more for the fancy plans.

Defined Benefit Plan
Thought that defined benefit plans had gone out with shag carpet? Maybe not. A defined benefit plan just might make sense for you. (These plans can be administered through a Keogh.) If you are in, say, your 50s, looking to retire in the next 10 years or so and haven't built up your nest egg yet, then a defined benefit plan is a good opportunity to save. You can contribute as much as is needed to give you an annual retirement payout of $170,000 or 100% of the average of your three highest consecutive pay years. (You'll need an actuary to help you with the calculations.) Unfortunately, what's good for you is bad for younger employees. Because they have more years until retirement, their contribution limit will be lower than yours.

And there are additional drawbacks. For starters a defined benefit plan can be expensive and it's not very flexible. For example, contributions are not optional. If you can't fund your plan, then you'll have to change your plan document. And "the IRS does not look kindly on companies that change their plan frequently," says Tom Ferrara, president of Future Value Associates, a company that helps establish benefits programs for small businesses.

Getting Started
Ready to set up a plan? Any of the big no-load mutual fund companies like Fidelity, T. Rowe Price and Vanguard would be more than happy to oblige. Or, if you want more hand holding, you can find yourself a good small business benefits consultant. But that will cost you. Finally, for more details on any of these plans, read IRS Publication 560.