Small Business Retirement Plans

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Transcript of Small Business Retirement Plans

What is 401(k)

Small Business Retirement Plans

Updated 07/29/2008

Why Start a Retirement Program?


2How much will I get from Social Security?

Read the following excerpt from the Social Security Administrations website:

Social Security was never meant to be the sole source of income in retirement.

A comfortable retirement is based on a three-legged stool of Social Security, company-sponsored retirement plans and personal savings.

3Tax Savings

There are two forms of tax savings:


Annually, the typical Paychex owner will save 30%-40% on every dollar put into a retirement plan. While this is important, the true POWER of a 401k plan is the Tax-Deferred (or Tax-Free through Roth Provision) growth the tax law allows.

Outside of Post-Tax Annuities, no other vehicle allows your savings to grow without being taxed on a yearly basis.

This power allows retirement dollars to grow at an incredible rate with time.

4Pre-Tax Growth vs Post-Tax Growth

Number of Years that Money is InvestedSaving $500 per month PRE-TAX*Saving $500 per month POST-TAX*10 Years$103,276$89,99320 Years$382,848$281,47330 Years$1,139,663$689,419*Assuming 25% tax rate, 10% rate of return, compounded only monthly

5So you dont want to take advantage of I.R.S. section 401?

Number of Years that Money is InvestedSaving $500 per month PRE-TAX* in a 401(k) accountSaving $500 per month POST-TAX in a Money Market Account earning 4% 10 Years$103,276$70,89820 Years$382,848$169,28030 Years$1,139,663$305,800*Assuming 25% tax rate, 10% rate of return, compounded only monthly

Questions to consider if you dont want a forced savings plan: Will You have the discipline to save EVERY month? Will You take the time to make good investment decisions? Will Your investment returns even keep pace with inflation?

6Cannot Predict Future, can only Prepare for it

ItemCost in 1985Cost in 20051 lb. Ground Beef$1.28$2.301 Dozen Eggs$.74$1.351 lb. Fresh Tomatoes$.70$1.841 Gallon of Milk$1.14$3.24In addition to the battle against inflation as you can see in the chart on the right, retirees are living longer and longer.

Recent studies have shown that a typical retiree can expect to live 20+ years. Therefore, one must acquire a large nest egg.7Cannot Predict Future, can only Prepare for it

Amount you will need to have saved upTo withdraw 4%To withdraw 5%$500,000$20,000$25,000$1,000,000$40,000$50,000$1,500,000$60,000$75,000$2,000,000$80,000$100,000$2,500,000$100,000$125,000$3,000,000$120,000$150,000How Big of a Nest Egg?

According to current life-expectancy figures, you could live 20 to 30 years after you retire at 65. To make sure your savings last as long as you do, experts say, you cant afford to withdraw more than 4% to 5% from your nest egg each year, adjusted annually for the rise in the cost of living. (Of course, youll also receive some income from Social Security.) Heres how big a personal nest egg youll need at retirement, depending on the annual withdrawals you plan to take.

8Attract Top Employees

Studies show that without benefits, outside of acquaintance or luck, a business owner cannot attract the best quality EMPLOYEES.Research shows small businesses need retirement benefits*While some research shows that small business retirement plans are too expensive for their potential customers, a new survey underscores the fact that employers might want to reconsider that notion.

By Editorial Staff While some research shows that owners think small business retirement plans are too expensive, a new survey underscores the fact that employers might want to reconsider that notion.

Fidelity finds that 49% of workers with a retirement plan say the would not take a job with a company that doesn't offer one. 68% percent of employees said that a retirement plan is critical or very important. Just 36% of employers said it was critical or very important to their staff recruitment and retention efforts.

* 2007 Employee Benefit News and SourceMedia, Inc. 9Retention of Current Employees

If youre not offering a retirement plan to your employees, dont be surprised to lose them to a competitor that does!Misconceptions about 401(k)s could cost Small Business OwnersBy Lynn Gresham

Forty percent of workers in small companies say they would leave their job for one that provided a 401(k) plan, according to a survey conducted by Harris Interactive and sponsored by ShareBuilder 401(k), a subsidiary of ING Direct. . . . 10Retention of Current Employees

Only 3 ways an owner can retain their employees:

1) $$$$ - Pay so much money that an employee cannot afford to leave.

2) ENVIRONMENT - Make the environment so great that employee doesnt want to leave even though they can make more money elsewhere.

3) LOW-COST BENEFITS - For the cost of one half (1/2) of a person for health insurance, you can offer a retirement plan to your whole company.11OK, so I think I need a Plan

Questions we will now answer:

How do I get money in a plan?How much can I get in?What are the 3 things I need to know to start a plan today?How much is this going to cost me?Will the government help pay for my plan?12How Do You Get Money In?

13A 401K is the most flexible tool a business-owner and employees can have to get money into a retirement program pre-tax. There are 3 ways to fund your 401(k). 1) Salary Deferral this is money that would come directly out of your paycheck each pay period before state and federal taxes are calculated (or if LLC, etc. mention how that works based on your probing) 2) Company match this is a tax-deductible amount your company can optionally contribute 3) Profit share this can be funded on a discretionary lump sum contribution that can be contributed once per year.

So, now that you know how you can get money in, lets show you how much you can get in your plan.Matching0% to 4%

Profit Sharing0% to 25%

Automatic Per Pay Period Contribution $16,500 Salary Deferral(1%-96% of Pay)

+ $5,500 Catch up Contribution for those Age 50 and overCombinedAnnual Maximum up to$$ 49,000 $$

New Comparability,Age WeightedHow Can You Maximize Your 401(k)?

EmployeeFundedOptional Employer Contributions

14 This slide is designed to show how employees and owners can put money into the plan up to the IRS dollar limit. If clients have an existing plan, this is a great opportunity to talk about profit sharing and how useful it can be. Weve put Fiduciary Responsibility in there as a wrap around to having a plan because we dont want it to come as a shock and be a deal breaker at some later point. It also sets the stage to talk about the custodial and trustee service in a later slide. From the top, its pretty straightforward. Be sure to highlight the fact that they can do any percent of pay, up to 15k. If catch up contributions might be used, its important to understand that they are treated as separate deferrals and not subject to compliance testing, which is a huge plus for key and hces. For a business owner that means they can keep their W-2 at a lower level (pay less FICA) and/or put their spouse on payroll for just enough to fund the 401k. Remind them that this was not possible a few years ago before EGTRAA. Matching: Most companies will do somewhere between 0% and 4% as a match., and Ill explain more on this in a few minutes. Profit Sharing: This is a great tool for businesses to use to offset tax liability and can act as a reserve account for the business owner as well. How often do you and your CPA look for any possible way to gain additional write offs and reduce tax burden? Profit sharing is a great way to do that. As an example, take an attorney, physician, or any business where the owner can and will put away as much as possible. If that person is 50, or going to be 50 this year and they are married, the owner and spouse can each put up to $49,000 into the plan. Thats $98,000 per year, and $980,000 of pre tax money in ten years before factoring in growth from eturns. The plan can be structured to allow the owner to receive the highest percentage of the contributions (New Comp). In addition, the owner can access that money through the loan provision of the plan. Instead of borrowing from a bank, you can borrow from yourself for any reason and pay yourself back at prime plus one percent. Ultimately, all of those contributions can total up to $44,000 for each person, $49,000 with catch up.

Fiduciary Responsibility: Because 401(k) plans are designed as an employee benefit, the IRS wants to make sure that it operates in the best interest of the participants at all times. For a business owner, this means that they bear the responsibility for being able to show that this is the case. Since its virtually impossible for someone whos running a business to monitor and know all the ins and outs of the plan, weve created a relationship with Mid Atlantic Trust Co to take over that aspect of the plan. It adds a layer of protection for the owner and the participants by making sure the plan is compliant with all aspects of fiduciary responsibility. Mid Atlantic will provide you with a complete reporting of the plans activity as well as a reporting on Paychex as the recordkeeper. Utlilzing this feature is all about peace of mind and knowing that you have a professional trust company looking out for the plan.

Your 401(k) plan, easy as 1-2-33 Simple Decision to Start a Plan Today

Optional Company MatchVesting schedule Multiple Investment Options

15What is compounding i