Client Alert Summer 98 - What's your best pension choice?

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Client Alert - Summer 1998

What's your best pension choice?

You've probably given some thought to establishing a pension plan for your business. Or perhaps you already have a plan, but you're not sure that it's still the best choice.

Pension plans can be very complex, so it helps to take things step-by-step. First, identify your choices. Then identify the features that interest you most and take action – or not – based on what's best for your business.

Your choices

For small business owners, there are basically three pension choices: a traditional 401(k) plan, a simplified employee pension plan (SEP), or one of the new SIMPLE retirement plans. For the self-employed, there is also the Keogh plan.

Plan features

Like any other complex product, each pension plan offers a unique combination of features. Consider these examples –

• SIMPLE plans are generally available only to companies with 100 or fewer employees. They also require mandatory employer contributions. If you want flexibility when it comes to making employer contributions, look at a different plan.

• If you want to make the largest possible pension contribution for your employees, consider a SEP or traditional 401(k) plan.

• "Vesting" refers to the period of time an employee must wait until an employer's contribution becomes his or her unrestricted property. Only a traditional 401(k) or Keogh allows you to control the vesting period. With SEPs and SIMPLE plans, vesting is full and immediate.

• Do you want each employee to be able to defer a portion of salary and contribute the deferred amount to his or her pension account? If so, you'll want to avoid a SEP, since it doesn't allow salary deferral.

• Every pension plan needs to be invested in something. With a SIMPLE IRA and SEP, your employees decide where to invest. With a 401(k) plan – traditional or SIMPLE – you must select the investment alternatives, and this is a responsibility that you may not want.

• Employees may be more likely to participate in a retirement plan if they can get their money out in an emergency or for some other good reason short of retirement. 401(k) plans generally allow employees to make hardship withdrawals or to borrow from their own pension accounts.

• As a business owner, you already deal with plenty of paperwork. In general, SIMPLE plans and SEPs will add relatively little to your existing burden. Traditional 401(k) plans and Keoghs typically involve more paperwork and are most likely to require the services of an outside consultant.

The next step

Business owners have more pension choices today than at any time in recent memory. If you are interested in establishing a plan, or if you would like to review your existing plan, please give us a call. There's a good chance that we can make something work for you.

Click Here to see a quick comparison of pension plans for small businesses.

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These articles are presented for informational purposes only. Please consult us for application to your specific information.

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