The competition for top talent is fierce in today's job market. One possible differentiator for companies aiming to recruit - and retain - the best and brightest candidates? Retirement plan options. Here’s a closer look at the pivotal role retirement plans can play in enticing top talent, along with tips for building a retirement plan that will improve your outcomes.
Common Retirement Plan Options
Employers have many choices when it comes to retirement plan options. Some of the most popular types of retirement plans include:
With cash balance retirement plans, employers guarantee that they will pay employees a set benefit amount upon retirement based on a formula that has been predetermined and is independent of the performance of any underlying investments. Potential benefits to employers include reduced costs, increased flexibility for owner-employees, and tax planning, including the fact that funds grow on a tax-deferred basis and contributions are tax-deductible.
Employee-sponsored 401(k) retirement plans allow workers to save and invest a portion of their income on a tax-deferred basis. While employers select the 401(k) type, which investments employees can choose from, and which investment management firm will manage the investment, employees decide on critical issues, including contribution rates.
Benefits to businesses are manifold, including attracting younger employees and owner retirement savings. Additionally, 401(k) plans typically mean access to many more investment options than you’d find with traditional plans. And because pre-tax 401(k) contributions reduce the taxable income of employees, they also reduce the payroll tax burden for employers.
A SIMPLE IRA, or “savings investment match plan for employees,” is a tax-deferred, employer-provided retirement plan allowing employees to set aside money in order to invest it for retirement. SIMPLE IRAs are most appropriate for startup employers with fewer than 100 employees and who do not offer alternative plans.
A SEP IRA, or “simplified employee pension plan,” shares many commonalities with the traditional IRA: contributions are tax-deductible and investments are tax-deferred until retirement, upon which distributions are taxed as income. However, while the contribution limit for traditional and Roth IRAs is $5,500 for 2018 (or $6,500 for people over the age of 50), it is much higher for SEP IRAs: the lesser of $55,000 or 20% of compensation. This can be appealing to job candidates. Due to rules requiring equal contributions for employees as a percentage of compensation, SEP IRAs are most suitable for self-employed business owners and small businesses.
Top Retirement Plan Attributes
There are a few features that stand out in retirement plans. Evaluating these within the context of what candidates value most can help you hone in on the most desirable retirement plan options for your business. Employees find the following four retirement plan elements especially compelling:
1. Employer contributions
Many retirement plans offer an employer match of some kind, which incentivizes retirement saving and helps employees build a bigger nest egg. According to research from Gallup, a staggering 50% of employees say they would leave their current job for one that offered a retirement plan with employer matches.
2. Automatic enrollment
In addition to wanting matching contributions, workers also value auto enrollment in these plans. According to a recent report, 71% of employees would like to be auto-enrolled with 67% prioritizing auto-escalation. Why? Because these attributes equate to more savings with less work on their part.
Retirement saving should be simple for your employees to understand. This removes the barrier to entry and empowers employees to play a key role in their savings plan. For example, while cash balance plans use a complex formula to determine employee benefit, the benefit is converted to a dollar amount and presented as a “hypothetical” account balance to make it easier for employees to track their savings.
One last thing to keep in mind? Regardless of the retirement plan options you choose, educating employees about retirement savings is paramount. According to a survey conducted by Ramsey Solutions, 40% of employees say their employers don’t provide any type of retirement or financial education.
This is significant because research also indicates that employers who don’t provide access to retirement education have employees with higher levels of anxiety and fear about retirement. Therefore, educating employees can not only encourage retirement saving, but it will make them feel like employers are invested in their personal and financial growth.
The workplace continues to evolve, but one thing remains constant: employees want and value the ability to save for retirement. And employers who offer desirable retirement plan options, including the educational component, will be able to attract - and retain - the best employees.