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As the baby boom generation heads closer to retirement age and the worries over Social Security begin to mount ever higher, many small companies are finding it difficult to recruit educated employees without offering some type of retirement plan. 

The pension environment has changed dramatically in this country over the last few years as large corporations began downsizing and forcing more employees into smaller companies that cannot typically afford the high administration fees of a defined benefit plan or often, even a defined contribution profit sharing or 401(k) plan.

There are several options available for small companies, of course and we will examine the pros and cons of each in this article:

Simplified Employee Pension

This plan (often called a SEP) is by far the easiest pension plan to establish and maintain.  It has become quite popular with very small businesses because it allows them to simply make contributions to each employee's own IRA account.  The employer contribution is limited to 20% of compensation or $45,000 in 2007.  The employee can still make his or her own $3,000 (in 2007) annual contribution.  

The big drawback for an employer, however is that since the money goes directly into the employees' personal IRAs, they are immediately 100% vested.   Since they can take the money with them to a new employer, there is no financial barrier to employee turnover that is built into more complicated plans with vesting schedules.  

Another consideration for employers considering a SEP is that it may be difficult to exclude part-time employees from participating in contributions.

SIMPLE-IRA

The SIMPLE-IRA, or Savings Incentive Match Plan for Employees-IRA, replaced the SARSEP-IRA for new plans established on or after January 1, 1997.

The SIMPLE-IRA is a tax-deferred retirement plan provided by sole proprietors or small businesses (fewer than 100 employees) who do not maintain or contribute to any other retirement plan. Contributions are made by both the employee and the employer. In a SIMPLE-IRA, contributions and the investment earnings can grow tax-deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income.

Annually, the maximum employee contribution is $10,500 in 2007  ($13,000 if age 50 or older), plus your employer's contribution. With the exception of the higher contribution limits, SIMPLE-IRAs are subject to the same rules as a regular IRA.

Profit Sharing

This is a more formalized plan which requires annual IRS reporting and generally costs much more to establish and administer.  The company will also have fiduciary responsibility to ensure that the plan is maintained in the best interests of the employees.  There is a tremendous amount of flexibility, however.  

The company can make discretionary contributions of up to 25% of employees' compensation or $45,000 in 2007 (subject to discrimination testing) and establish vesting schedules which may encourage long-term commitments from employees.  Profit sharing plans also may allow loans and hardship withdrawals for the employees.

401(k) Profit Sharing

A profit sharing plan which allows pre-tax salary reductions of up to $15,500 in 2007 each by the employees.  The employer may match the employees' contributions up to a maximum of 25% of compensation.  The administration and record keeping requirements are similar to those of a typical profit sharing plan.  The employer match can be used to encourage participation.

Money Purchase Plan

A money purchase plan has a fixed contribution formula and allows employer contributions up to 25% of compensation or $45,000 in 2007.  Many employers pair them with a profit sharing plan for maximum flexibility and contributions.  There are, however several specific requirements involved in the distribution rules of a money purchase plan.

We can assist you in examining all of the options of establishing a retirement plan for your employees.  It pays to shop around when looking for an administrator or investment company since their fees can vary widely and many of them use complicated fee schedules which can create difficulty in trying to compare them.  If your company has around 100 employees, you should expect to have 401(k) startup fees between $1,000 and $2,500 and administration and investment fees between $50 and $100 per participant per year.