Outside-IN

Closing the retirement savings gap for employers and employees alike

Matching an appropriate retirement plan with business owners' needs is a strategy overlooked by many advisers

Oct 24, 2019 @ 3:00 pm

By Cathy Clauson

In today's low unemployment rate environment, competition for top talent is fierce. So how can businesses owners compete to attract and retain quality talent? And how can financial advisers help them do this? Ultimately, the solution lies in taking care of your employees.

One important way employers can do this is by offering their employees a 401(k) with a profit-sharing plan. This allows the employees to benefit from their hard work and role in helping to grow the company without the business owner giving up equity in the company they have worked hard and sacrificed to build.

These plans offer numerous benefits to business owners looking to stay competitive, scale their businesses, and attract top talent. Notably, profit-sharing plans can help business owners plan for retirement for themselves and their employees. They can incentivize employees to work hard and stay at their firms, since direct contributions depend upon the company's growth and earnings. These plans also offer flexibility while providing a comprehensive retirement package for all employees. By utilizing this plan type, employees can save even more for retirement — a major consideration for baby boomers, as reported by the Insured Retirement Institute, 45% of them have zero savings for retirement. A 401(k) with a profit-sharing plan can also lower the employers' tax liability.

With all these advantages in mind, it's important to note that one plan does not fit all, and there are various plan options to suit employer needs:

Pro-rata plans are the most commonly used profit-sharing plan type and immediately pass the discrimination test. They tend to work best for employers without consistent cash flow and those in need of greater flexibility — specifically those who don't have the means to always make contributions.

New comparability plans offer the most flexibility for business owners, allowing them to customize their contributions. This plan option is great for employers who wish to maximize contributions or contribute to the rest of their employees at different rates. It works well for older owners working with younger employees.

Age-weighted plans are most helpful for retaining talent because contributions are based on employees' ages and how many years away from retirement they are. In this case, contributions increase as employees get closer to retirement, which can reduce employee turnover.

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While a 401(k) with a profit-sharing plan may not be exciting dinner party conversation, they certainly are a key topic of discussion among financial advisers who are working with business owners. Advisers play a crucial role in understanding the goals of the business owner, recommending the type of plan that will best address their needs, and working with the service providers that can help with plan design and implementation.

Matching an appropriate retirement plan with business owners' needs is a simple, yet often overlooked strategy. It can go a long way in closing the retirement savings gap for employers and employees alike, while helping the business owners attract and retain quality talent. Above all, a 401(k) with a profit-sharing plan ensures that employees have skin in the game. Do yours?

Cathy Clauson is senior vice president of retirement solutions at AssetMark Inc.

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