Options for the Small Business Owner
SEPs, SIMPLEs, 401(k)s, Money Purchase, Profit Sharing… It can all sound confusing and a little overwhelming, so how can a small business owner decide what is the “best” type of plan?
At First Investors, we recognize that your organization is unique, and the requirements of you and your employees are different from those of other companies. That's why we take the time to learn about your business and your needs before we make a customized recommendation.
Two Principal Types Of Plans:
There are two primary types of retirement plans that are most typically used in small-to-mid-sized businesses. Qualified Retirement Plans ("QRP") can generally be classified as either “defined benefit” or “defined contribution” plans.
- Defined Benefit (D.B.) 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 (D.C.) 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.
The easiest way to distinguish between the types of defined contribution plans is through the source of the contribution.
If you want a plan that only uses employer money, consider either MPP/PSP (Money Purchase Plans /Profit Sharing Plans) or the SEP-IRA (Simplified Employee Pensions).
SEP-IRAs 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.
If you want a plan that uses employee money, consider a 401(k) Plan or a SIMPLE - IRA (Savings Incentive Match Plan for Employees). The SIMPLE-IRA is another product specifically designed for small businesses. It features tax-free contributions and tax-deferred growth and is meant for businesses with fewer than 100 employees.
Please note: Certain non-traditional alternatives are also available, such as the Defined Benefit and/or Cross-tested Plans. These may have particular appeal in certain circumstances. A First Investors registered representative can meet with you to answer any questions you might have about retirement-plan options.
