Retirement plans can take many forms, but the biggest difference between them all is where the investment risk lies. For reference, let’s look at two common examples: ‘Defined Benefit’ and ‘Defined Contribution’. With Defined Benefit plans, the investment risk lies with the employer, whereas with Defined Contribution plans, the investment risk lies with the employee. The placement of investment risk is the primary reason many companies that had previously offered Defined Benefit plans no longer offer them.
Other retirement plan types include, Money Purchase plans, Age-Weighted plans, New Comparability plans, Simple plans, and SEP plans, among others. In addition, Deferred Compensation plans can be used to carve out specific employees.
Let’s look at a 401(k), for example, which gets its name from its associated tax code chapter. 401(k) plans are very popular Defined Contribution plans where risk is borne out by the employee, and the program many people automatically think of when they hear ‘retirement plan’. Not to mention, there is approximately $5 trillion in assets in U.S. 401(k) plans.
In general, an employer—the plan sponsor—arranges for a TPA to administer a plan that defers compensation on a pretax basis. These funds are withheld from employee compensation and invested to fund choices in the plan at the discretion of the individual employee. These funds usually consist of various mutual funds or fund pools making up a target date portfolio. The employer handles the fund selection, though usually the employee is able to make frequent changes to his or her portfolio. The TPA, meanwhile, handles the reporting, discrimination testing, and individual statement dissemination.
Plan fees are usually stated as a one-time set-up fee that’s assessed per employee. The employer may pay these fees, or they can come out of the account of the participants in the plan. The money grows tax-deferred until the plan participant reaches retirement age. Tax penalties are assessed if the participant takes any withdrawals prior to age 59 ½. However, withdrawals must begin by age 70 ½.
This is a very brief synopsis. Other aspects to be discussed include other potential expenses, asset placement, TPA selection, matching contributions, and whether or not to permit loans. We work with TPAs that specialize in the intricacies of retirement plans, and we’ve selected them personally to ensure you will have the best possible experience.
Please feel welcome to contact us about the many options for your organization.