Last Updated: February 08, 2023
Compare Pros and Cons of Offering Employee Retirement Plans
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An Expert Comparison of 401(k) Plans
If you’re a small business owner, undoubtedly you’ve wrestled with introducing an employee retirement plan. You’d love to provide retirement benefits to the staff you value, but you’re not sure if it’s a sound business decision. Here, we’ll describe some of the pros and cons to help you make that important decision.
Types of Employee Retirement Plans
The good news is, you have options. An employee retirement plan doesn’t have to be structured as traditional pension that will deplete your company’s cash flow. There are many types of plans, including several that are well-suited to small businesses:
- Defined contribution plans include 401(k)s, profit-sharing plans and money purchase plans. They work for all types and sizes of businesses. Contributions are made by the employee and/or the employer.
- Simplified Employee Pensions (SEP) are ideal for businesses with just a few employees. The employer makes the contributions for all employees, but the contribution amount is flexible and the plans are simple to set up and operate.
- SIMPLE IRAs are similar to 401(k)s. Both employees and employers may contribute to the plan, and employers may match employee contributions. These are well-suited for companies with fewer than 100 employees.
These are just a few of the many options available to businesses looking to offer an employee retirement plan. There are also more traditional defined benefit plans that work best for companies with substantial cash flow, and there are plans designed strictly for executive staff. You should understand all of the options before deciding on one.
Pros of Offering Employee Retirement Plans
- Stronger workforce - A retirement plan will help you attract and retain a strong workforce. Many talented workers won’t consider working for a company that does not offer retirement benefits.
- Better productivity - Instituting a retirement plan tends to increase employee loyalty and productivity, especially if the plan involves profit sharing.
- Tax advantages - The government wants to encourage employers to offer retirement plans to employees, so it offers tax advantages to businesses that do. The tax advantages vary based on the type of plan.
- Personal retirement savings - As the owner of the company, you can also take advantage of the retirement plan to save for your own future.
- Boosts compensation package - If you’re short on cash, instituting a retirement plan can be a cost-effective way to increase employee compensation without raising salaries.
Cons of Offering Employee Retirement Plans
- Costly - Offering a retirement plan is not free. There will be administration costs for setting up and monitoring the plan, in addition to any employer contributions you’ll be making. The plans can be costly.
- Time consuming - Setting up and administering a plan requires time and effort, and the process can be confusing.
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