By Winnie Sun
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Small-business owners are often so driven to make their companies succeed that they forget to take care of their own retirement. And they sometimes forget to take care of their employees’ retirement, too.
More than one-third of private-sector workers don’t have access to a retirement plan through their workplace, and less than half of businesses with 50 or fewer employees offer such plans. That’s fueling a retirement savings crisis, because many workers don’t save anything outside of employer-sponsored plans.
Small businesses can help by making a fundamental shift in the way they view setting up retirement plans for employees. And they can do it by going old school. It’s time for small-business owners to bring back defined benefit plans, better known as pension plans, in a move that can help both employees and the owners themselves.
Benefits of pension plans
Unlike defined contribution plans such as 401(k)s, in which employees set aside a certain amount or percentage of their salary each month for retirement, defined benefit plans guarantee a certain amount for employees at retirement based on length of service and other factors. This creates more certainty for employees about their retirement funds.
But the percentage of workers in the private sector with these pension plans has declined sharply since the 1990s, driven by employer attempts to reduce costs, regulatory changes and other reasons.
These factors have obscured some of the benefits of pension plans, both for small-business owners and their employees. Here are a few reasons why bringing back pensions can help your small business.
Making a pension plan part of your small business benefits package can help you lure more talented employees, increase employee retention and set your business apart from the competition. As employers look for ways to differentiate themselves in the war for talent, a defined benefit plan can be a selling point.
One advantage to pension plans is that they can be funded on a profit-sharing basis. If employees know their retirement is tied into results, that can motivate them to increase productivity. Offer profit-sharing pension plans on a gradual vesting basis, resulting in a stable and long-term workforce that never stops trying to help the company achieve its goals.
Pension plans enable owners to contribute much more to their own retirement funds than other plans. Owners can contribute up to $215,000 in 2017 for rapid funding of a retirement plan, compared with a maximum overall contribution limit of $54,000 for 401(k) plans.
The pension’s higher contribution limit is an excellent way for small-business owners who have neglected to save for retirement to catch up and is especially beneficial for small companies with a few younger, low-paid employees.
Much like 401(k) plans and IRAs, self-funded pension plan contributions are tax-deferred for small-business owners, which allows them to pay taxes upon distribution, when their taxable income is likely lower. (Note: Employees can’t defer the contributions their employer makes for them.)
They’re not right for everyone
Before you get started, know that there are costs involved. Pension plans have long-term benefits, but won’t be cheap to set up. Annual administration fees are often higher than those of other retirement plans. You’ll need to pay an actuary to calculate employee funding levels annually. And if your business needs a lot of liquid capital, pension plans may not be the right fit. But for many small-business owners, the retirement-savings benefits of a pension plan make it a good option.
Contact an experienced financial advisory firm or your accountant for more information on defined benefit plans or other small-business retirement programs.
For many successful entrepreneurs, a pension plan will protect their personal wealth and their business, all while maximizing retirement savings and tax benefits.
Now that’s a plan.
The article Why Small-Business Owners Should Offer Pension Plans originally appeared on NerdWallet.