If your business has changed recently, consider whether your retirement plan is still the best one for your company. Here are several events that may trigger a need to re-evaluate your retirement plan.
- Changes in your business type: If your company changes its legal form from sole proprietor to partnership or corporation, retirement plan changes may be in order. A sole proprietor needs to use the retirement vehicles available to self-employed people, such as a Simplified Employee Pension plan, or SEP. A small partnership or corporation with up to 100 employees, however, might opt for a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) to shelter retirement savings from taxes. An even larger company could add a 401(k), also known as a “defined contribution” plan, or traditional pension plan, known as a “defined benefit” plan.
- Growth or shrinkage in the number of employees: If you’ve been shedding employees, the administrative costs of a large 401(k) or pension plan may no longer make sense given the smaller employee base. On the other hand, if the company has added many employees and foresees continued growth, it may be time to examine the ages and earnings demographics of those workers to see if the current plan is best suited to employees’ needs. A company survey can help pinpoint the type of plan that would gain the most worker participation.
- Changes in what competitors are offering: No business operates in a vacuum. If your closest competitor has upped its company matching contribution, you may lose workers if you don’t improve your plan.
- Desire to attract more highly trained workers: Workers who earn more generally have more money available to put away for retirement and may take a higher interest in the details of your retirement plan.
- Desire to share growing profits equitably with employees: If your company has struggled through its startup phase and is now solidly profitable, one way to build worker loyalty is by instituting a company profit-sharing plan that grants employees cash or stock annually. Another option is an employee stock ownership plan, or ESOP, which is invested primarily in company stock.
- Rising taxes that a write-off could reduce: Companies receive substantial tax breaks for retirement plan contributions, so a growing business might gain substantial tax relief from instituting a plan.
- Entry into a new business sector with different retirement plan norms: When companies develop new products and enter new markets, they sometimes find themselves competing with companies offering different benefits. To attract workers from a new sector, companies may need to upgrade their retirement plans.
- A merger or acquisition: Commonly when two companies become one, only one of the retirement plans survives. A retirement planning professional can help company management evaluate which plan will be best for the newly combined company and take the necessary steps to notify workers on the obsolete plan of their options.
- Changes to the options in your current plan: Particularly in 401(k) plans, the fund options available to workers may shift from year to year. If options are growing more limited, it may be time to seek out a new, more flexible plan.
- Management changes in the plan: Sophisticated retirement plans such as 401(k) plans are only as good as the managers who run them. Often a company signs onto a plan in part due to the reputation of a current plan manager. If that manager departs, it may be time to re-evaluate whether you want to stay with that plan.
- Changes in laws: In 2006 a major pension reform law brought changes to many aspects of pension plans. For instance, formulas for minimum contributions changed in some cases. A change in how you are required to administer your plan may lead you to consider other retirement plan options.
- Introduction of new retirement vehicles: In 1998 the flexible Roth individual retirement account introduced a new retirement option. Stay aware of emerging retirement choices that might provide new options for your company or your workers.
In any of these cases, consulting a retirement planning expert is advisable before making any plan changes.
Business reporter Carol Tice contributes to several national and regional business publications.