PLANADVISER - July/August 2020 - 18

research / 2020 PLANADVISER Recordkeeper Services Survey
in Los Angeles. " What features-such as loans, eligibility
criteria or vesting schedule-are you looking for in a plan?
And how much are you willing to spend to administer it? "
Here is a rundown of the most common types of plans
small employers can choose from, plus some of the main
advantages and disadvantages associated with each:
401(k) Plan
A traditional 401(k) plan remains the most popular choice
for large employers when it comes to retirement saving,
but it is also a smart choice for some smaller employers.
While the administrative burden and cost of administering
such plans may have made them inaccessible to
many small businesses in the past, new rules that allow
for pooled employer plans may now make them a viable
option for some.
PROS: The 401(k) has the highest annual IRS limits
for employee contributions-individuals may save up to
$19,500 into one of these plans-$26,000 if they are 50 or
older-and does not require the employer to contribute.
Plan sponsors that do contribute can determine the vesting
schedule for that money, which may help reduce employee
turnover.
" With a 401(k), an employer has great flexibility with
regard to how it designs the plan and what type of contribution
it will make-if it wants to make a contribution, "
says Kristin Tweed-Andreski, senior vice president, general
manager, retirement services at ADP in Florham Park, New
Jersey. " It can change its mind on an ongoing basis, as long
as it is treating all of its workers the same. "
These plans can scale with
a company, so they are a good
choice for employers that plan
to quickly grow their business.
These plans can scale with a company, so they are a
good choice for employers that plan to quickly grow their
business. Plan sponsors can also choose to include other
elements in their plan design, such as allowing loans and
withdrawals, instituting automatic escalation of deferrals,
or allowing for Roth contributions.
CONS: A 401(k) plan may have higher administrative
fees and testing requirements than other types of employersponsored
retirement plans. In particular, top-heavy testing
may prove a challenge.
" Measuring how key and highly compensated employees
[HCEs] contribute versus rank-and-file employees can turn
up compliance issues, " Tweed-Andreski says. " In that case
a SIMPLE IRA may be a better solution because the compliance
testing is not required. "
Employers may be able to avoid some of the testing by
opting for a safe harbor 401(k), which eliminates the need
for testing but also requires an employer contribution.
Under a safe-harbor 401(k) plan, employers must match
either an employee's deferrals of 3% of his salary, dollar for
dollar, plus 50% of the next 2%, or 100% of 4%.
SEP IRA
In a simplified employee pension (SEP) IRA plan, the plan
sponsor makes pre-tax contributions for its employees
based on a percentage of employee income. These plans
are available to businesses of any size, including those
with only one employee, and there is no tax filing requirement
for the employer.
Employees typically do not contribute to a SEP IRA.
" If you're looking for a plan where it's only the employer
making contributions, the SEP IRA makes sense, " says Dan
Basile, head of retirement products at Ascensus in New York
City. " It's a pretty simple plan. "
While the contribution limits are much higher than
those for a traditional IRA, the SEP is subject to the same
IRS rules covering withdrawals and distributions as a
traditional IRA.
PROS: SEP IRAs are relatively easy to set up, and they
provide the plan sponsor with the flexibility to determine
whether it wants to contribute in any given year and the
size of any contribution it will make.
Once it has decided to contribute, a sponsor must choose
a uniform percentage of compensation, which it gives on
behalf of each employee who is 21 or older, has earned at
least $600 and has worked for the employer for three of the
past five years.
Employer contributions are capped at $57,000 for 2020, or
25% of an employee's compensation. That makes SEP IRAs
a useful vehicle for self-employed professionals looking to
save for their own retirement.
CONS: The requirement to contribute the same
percentage to all employees' accounts can get expensive
for plans with many participants. That makes the SEP IRA
a better choice for businesses with few or no employees,
for closely held family businesses or for those where all
employees are principals, says Kevin Boyles, vice president
and business development director with Millennium Trust
Co. LLC in Oak Brook, Illinois.
SIMPLE IRA
A savings incentive match plan for employees, or SIMPLE
IRA plan, is available to employers with up to 100 workers
who each earn at least $5,000 per year. These plans are
among the easiest for employers to set up, with low startup
costs and a minimum of required paperwork. The IRAs are
subject to the same rules regarding withdrawals and distributions
as a traditional IRA.
" A SIMPLE IRA [plan] behaves a lot like a 401(k)-it's
like a 401(k) light, " Boyles says. " It's structured very much
the same in terms of employee contributions, but there
are significant differences-the matching formula, the
employee contribution limits. "
(Continued on page 20)
18 | planadviser.com July-August 2020
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PLANADVISER - July/August 2020

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