2020
PLANADVISER Recordkeeper Services Survey

To Each Their Own

Advisers look to recordkeepers for savings vehicles—including SEP and SIMPLE IRAs— to equip employers of all sizes

Advisers look to recordkeepers for savings vehicles—including SEP and SIMPLE IRAs— to equip employers of all sizes

Small businesses increasingly recognize the importance of offering retirement benefits to their workers. These can be a powerful tool for employee acquisition and retention, provide a valuable employer tax benefit, and lead to better financial health—and lower stress—for workers.

Yet, only four in 10 employers with fewer than 100 workers offer them such benefits, according to a LIMRA study. There are many reasons for the lack of adoption, including concerns about the cost and the logistical work associated with implementing the benefits. Still, the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act may ease the way for some small employers to offer a 401(k) via a pooled employer plan (PEP).

And 401(k)s are not the only option—there are other plan types that could be just right for certain prospects. To that end, this year’s Recordkeeping Services Survey includes information about the marketplace for SEP [simplified employee pension] and SIMPLE [savings incentive match plan for employees] individual retirement account (IRA) plans.

In addition, the SECURE Act offers tax incentives to small businesses that implement a new plan. They can get up to $5,000 to cover startup costs, and another $500 if they go with a SIMPLE IRA plan or a 401(k) plan with automatic enrollment.

For advisers, helping a plan sponsor select a plan starts with the company’s goals, says Christa Iacono, assistant vice president, institutional product manager, Capital Group 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. 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 employer-sponsored 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 Dresher, Pennsylvania. “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.”

Pros: While SIMPLE IRAs have a mandated employer  contribution, plan sponsors do have some flexibility in those contributions. They can either match an employee’s deferrals, dollar for dollar, up to 3% of his compensation or make a nonelective contribution of 2% of his compensation, up to $5,700 a year.

There is less administrative work required to run a SIMPLE IRA plan than for most 401(k)s, as there is no vesting schedule or testing requirement.

Cons: While employees may defer earnings to their SIMPLE IRA, the IRS limits the amount at $13,500 per year—$16,500 for account holders 50 and up. Employer contributions vest immediately, which diminishes the value of these plans as an employee retention tool.

SIMPLE IRAs may not be the best choice for an employer that means to scale quickly. Once it has over 100 employees each earning $5,000 per year, it will need to transition to another plan.

Another potential drawback of these plans is, annually, the 60-day notice requirement as to changes.

According to Boyles, “If [a sponsor is] going to make changes, it really has to do it by October.” This is to give participants time to adjust their deferral amount or make any other such changes during the 60-day election period that typically ends the year. “Then you’re stuck with those changes until the following year,” he says. “With a 401(k), you can modify the plan document on the fly, so it’s more flexible.”

Payroll-Deducted IRA

Rather than a full-fledged retirement plan, a payroll-deducted IRA plan lets employees make deferrals to an IRA from their paycheck, Boyles says.

Pros: There is little to no cost for employers to set up a payroll-deducted IRA plan.

Cons: Payroll-deducted IRAs have traditional IRA limits, so employees may sock away only up to $6,000—$7,000 for those 50 and over. There is no option for employer contributions.

—Beth Braverman

Art by Eric Hanson