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Retirement Presentation For Small Business
- 1. Retirement Plans for Small Businesses Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested. Glenn Cowan, LUTCF Investment Advisor Representative OppenheimerFunds, Inc.
- 10. 1. This hypothetical example is not intended to show the performance of any Oppenheimer fund, for any period of time, or fluctuations in principal value or investment return. 2. Retirement assets are taxed when withdrawn. Withdrawals prior to age 59 ½ may be subject to a penalty tax in addition to ordinary income taxes. What’s in it for you? The potential for accelerated growth of savings due to tax-deferred compounding The illustration here shows how much faster money can grow in a tax-advantaged retirement plan relative to a comparable investment in a non-tax-favored vehicle. Assumes $100 of salary saved per month, 8% rate of return, 20-year savings period 1 . Page RE0000.191.1208 $59,308 $43,696 $32,759 $27,713 Retirement Plan 2 15% Tax Bracket 28% Tax Bracket 35% Tax Bracket
- 17. Comparing Plan Types Maximum Annual Contributions 2009 Figures do not include Catch-up contributions (where otherwise applicable) Page RE0000.191.1208 Compensation SIMPLE IRA SEP IRA Single K Single DB Plus $40,000 $12,700 $10,000 $26,500 $100,000+ common (depends on income, age, years to retirement) Annual benefit as high as $195,000 $80,000 $13,900 $20,000 $36,500 $120,000 $14,100 $30,000 $46,500 $196,000 $17,380 $49,000 $49,000
- 45. Single K Plan SM Not available to businesses with employees Considerations SEP IRA Payroll Deduction IRA 401(k) Non-traditional Profit-sharing plans Profit-sharing Safe Harbor 401(k) SIMPLE IRA Defined Benefit Non-qualified Deferred Comp. Single K Plan SM Page RE0000.191.1208
- 66. It Doesn’t Matter Who Provides Your Retirement Plan One Other Myth: Page RE0000.191.1208
- 69. Global/International Equity Small-/Mid-cap Equity Large-cap Value High Yield Income Aggregate Income Large-cap Growth Cash Conservative funds generally carry a lower level of risk but also offer lower rates of return. Aggressive funds generally carry a higher level of risk but have the potential to offer a higher rate of return. Investment Choice Page RE0000.191.1208
Notas del editor
- First, thanks for meeting with me. You’re busy, and I know you’ve probably got a long list of things to do today. That’s why the information I’m going to share with you will take just a little amount of your time. When I’m done, though, I hope that you’ll agree it deserves more of your attention than that. Because, really, what you do with the facts you’re about to hear will help determine how you spend 10, 20, perhaps even 30 years, of your life. Some of you may already have a retirement plan in place. If so, we’ll examine whether your plan is still the best option for you and your business.
- If you’re one of the few small-business owners who has a retirement plan, congratulations! Surprisingly, according to the Department of Labor, only 45% of companies with 99 or fewer employees offer a retirement benefit. If you don’t already have one, you’re passing up a terrific opportunity to enhance the financial security of your later years. You’re also ignoring a number of great advantages that could make a real difference right now. Let’s take a brief look at why establishing a retirement plan is a smart choice.
- With advances in medical technology, most people will need enough assets to support a retirement that could last two or even three decades. And, speaking of medical technology, health and long-term care expenses are likely to be one of your major retirement costs. Then there’s Social Security. While no one knows exactly what will happen to it, many expect the program will experience cutbacks. You should also be aware of what the eroding impact of inflation can do to the savings you have squirreled away. Even at a rate of 4% per year, your cash will lose more than half of its purchasing power in 20 years. Now, the question is, do you want to be age 65 or 70 facing these possibilities without adequate resources?
- There are three major misconceptions that keep many business owners from putting together the kind of retirement strategy they need. They have decided not to establish a plan for some mistaken reasons based on outdated information. Let’s take a look at each myth.
- The first myth is “My business will subsidize my retirement.” Most business owners have immediate problems that seem far more pressing than how they’ll finance an event that’s years away. But thinking that you’ll pay for retirement with the windfall you get from the sale of your business is an easy way to put off some hard decisions…and that could be a big mistake.
- While being in business for yourself has always been a risky undertaking, it’s probably never been riskier. A new competitor…a new product…a new technology…an unexpected hardship… a downturn in the economy—and the risk that the market value of your business can plummet in very short order, are all hazards and obstacles small businesses eventually face that contribute to the uncertainty of their success. Even two or three mediocre years right before you plan to sell your business can have a severe impact—especially if you’re not inclined to put a lot of money into its recovery. Are you willing to have the quality of your later years depend entirely on the fate of a single venture—even if it is your own?
- The second myth—“I can’t afford a plan”—is a very common notion. And there’s really just one appropriate response to it: you can’t afford not to have a plan. Today’s retirement plans are not the ones you may have looked at in years past. Very recently, Congress has supported new retirement arrangements that are a lot friendlier to smaller ventures. These programs are now less expensive, more flexible and much easier to administer. And some require little—or even no—special testing or reporting to make sure they comply with government regulations. Yet they still offer the same tax advantages and competitive edge that have made retirement programs so popular with larger companies.
- The third myth says that you can’t attract high-caliber employees without a high-caliber paycheck. Quality employees are in great demand these days. And while money is usually the biggest draw, it’s not the only one. Employees today, even younger ones, are seriously considering their retirement security. With so many large-company workers saving through 401(k)s, the financial media has given employer-sponsored plans—and retirement issues, in general—a huge amount of publicity. Even nonfinancial media are discussing these subjects in depth. The result of all this attention is a growing awareness of the need to save for retirement.
- Your contributions and all investment earnings—capital gains, interest and dividends—remain sheltered from taxes until you withdraw the money at retirement…when your tax bracket could be lower. What’s more, you decide how those dollars should be invested among the Oppenheimer mutual funds you’ve selected for your plan.
- The impact of saving on a tax-deferred basis can give your nest egg a dramatic boost. This illustration shows how much faster money can potentially compound in a tax-advantaged retirement plan, relative to a comparable investment in a non-tax-favored savings vehicle. Assuming an 8% rate of return and a 20-year savings period, you can see that an individual putting away just $100 a month through a retirement plan has quite an advantage, regardless of his or her tax bracket.
- Then there are the advantages of investing in mutual funds within a retirement plan. These include diversification and asset allocation. Diversification is spreading your risk by investing in a variety of securities—not just across three major categories, but within each group as well. Why invest in several kinds of stocks or bonds? Even investments in the same asset class have different patterns of risk and return. And because they do, the poor performance of one can often be offset by the good or stable performance of others. Let’s take a look at the illustration here comparing the difference between a diversified and nondiversified portfolio. This client invested a lump sum of $100,000 into a single investment earning 5% a year for 20 years with no other changes to principal. If that client placed the same $100,000 split into five $20,000 investments, each earning a different rate of return (in one case showing a loss), for the same 20-year period, he would have come out ahead.
- You can further diversify your risk through what is called asset allocation. Asset Allocation involves maintaining a target mix of stocks, bonds and cash equivalent investments that reflects the best balance of risk and reward for your individual situation. Many financial experts agree that the way you allocate your money among these three asset classes—rather than how good you are at choosing individual securities—has, by far, the biggest impact on your long-term returns and the volatility of your overall portfolio. The percentage of your money you place in each class depends, to a large degree, on what your objective is, how much risk you’re willing to take and how much time you have. The model portfolios shown here are designed to guide you in structuring an investment mix appropriate for your own time frame and risk tolerance. They may not be suitable for all individuals in all situations.
- Now what about your business…how can a retirement plan help? Well, first of all, it’s a tax shelter for your business, too. Since employer contributions to a qualified retirement plan are a tax-deductible expense, sponsoring a plan also gives your business an immediate tax break. Second, putting a retirement plan into place can be a surprisingly inexpensive and simple way to add a major incentive to your benefits package. In a moment, when I review the highlights of these plans, you’ll actually see how cost-effective and easy it can be to set up and run one. Third, today’s retirement plans give small employers more flexibility than ever before. You can control how the plan is funded...the maximum amount that can be sheltered under the plan…who’s eligible to participate...when employees are vested…what types of investment funds are available to your workers...and even how much time you want to spend administering the program.
- Last of all, what about your employees? What’s in it for them? They’ll achieve the same benefits we’ve already mentioned: Postponement of taxes on contribution and earnings until withdrawal Control over the investment of their accounts Accelerated growth of savings due to tax-deferred compounding Diversification through mutual funds Asset allocation Think of the peace of mind they’ll enjoy. Just knowing they’ve got a nest egg invested can relieve a good deal of anxiety about the future. Bottom line, most small business owners—and I’m sure you’re one of them—want to do what’s right for their employees. They know that their workers—like themselves—need to save for their futures. I really don’t think that there’s a better way to help them do that than by giving them access to the tax advantages of a retirement savings plan.
- If you set up your plan a few years ago, the situation that led to your choice could be entirely different today. Changes in the composition of your work force, a larger number of employees, a more solid financial picture, tax law changes—these are just some of the reasons you might get more out of a different type of plan. (Optional: Actually, based on what you’ve already told me, I know of several other alternatives you’ll want to consider.) Also, the range of plans available is now wider than ever. Over the last several years, Congress has authorized some new retirement arrangements aimed at small businesses. Another important reason to consider a change: you may be disappointed in the service and investment options offered by your current provider. Are your administrative tasks kept to a minimum? Is your recordkeeping timely and accurate? Do your employees have the type of educational materials they need to build their investment knowledge? And the account access and investment options to effectively manage their own retirement assets? If you’re on the fence with respect to any of these critical issues, it’s definitely time for a change. And, shortly, I’ll demonstrate why a switch to OppenheimerFunds deserves your strongest consideration. To help you begin the process of deciding whether the plan you’ve got is actually the best one for you, I’m going to give you a quick overview of what’s out there today.
- So, let’s assume that establishing a retirement plan is a step you want to take. Or maybe you’re unsure if your current plan is the best one for your business. Let’s take a look at what kind of plan is best for you. (Optional) While OppenheimerFunds offers several types of retirement plans, thanks to the questionnaire you filled out earlier (or “what you’ve already told me about your business and needs”), I’ve been able to narrow down the options to those most appropriate for your situation. To help you make a decision, I’ll give you a quick overview of each plan’s key points. There’s a good deal more information I can share with you later. And I do have materials for you to review at your leisure. For the moment, though, I’ll focus on the major features of each plan.
- Let’s take a look at the maximum amount a business owner can contribute to depending on the type of plan they establish. For simplicity sake, let’s assume the business owner has not reached age 50 and catch-up contributions don’t apply. In addition, let’s assume the business owner makes the maximum contribution permitted under each plan. In a SIMPLE IRA, the maximum contribution a business owner can make in 2009 is a $11,500 deferral plus a 3% matching contribution based on annual compensation. In a SEP, the maximum tax deductible contribution a business owner can make in 2009 is 25% of annual compensation, up to $49,000. In a Profit-sharing or Money Purchase Pension plan, the maximum tax-deductible contribution a business owner can make in 2009 is 25% of annual compensation, up to $49,000. With a Single K, the maximum tax-deductible contribution a business owner can make in 2009 is 25% of annual compensation plus an additional $16,500 in deferrals. Overall limits cannot exceed 100% of income up to $49,000 ($54,000 for individuals age 50 or over). With a Single DB Plus, contribution limits commonly exceed $100,000 per year. The limit is dependent on various factors such as income, age, years to retirement. The annual benefit is as high as $195,000 a year in 2009.
- SIMPLE IRAs are one result of Congressional focus on the needs of small businesses. They’re designed specifically for employers with 100 or fewer eligible employees. Individuals with self-employment income earned on a part- or full-time basis and nonprofit organizations (including governmental entities) can also adopt SIMPLE IRAs.
- SIMPLE IRAs require employers to contribute to participants’ accounts and give employees the option of adding their own contributions through pretax salary deferrals. Employees can make annual pretax, salary deferral contributions of up to $11,500 or 100% of income, whichever is less. In addition, catch up contributions limited to $2,500 may be made by participants age 50 and over.
- As the employer, you can handle your funding of the plan in one of two ways. First, you can match each employee’s contributions dollar-for-dollar, up to 3% of compensation. You also have the added option of matching as little as 1% of each participant’s compensation for any two years out of the last five year period.
- The second alternative is to contribute 2% of each eligible employee’s compensation, regardless of their participation in salary deferrals. Please be advised the compensation cap for 2009 for this purpose is $245,000.
- On the whole, if you’re looking for a plan in which workers share responsibility for their own retirement savings, but without the cost and complexity of a traditional 401(k), a SIMPLE IRA may be an ideal solution.
- Although SIMPLEs are easy and inexpensive, remember that your contributions are mandatory, which may make these plans somewhat more costly than other alternatives. In addition, employee contributions are 100% vested immediately, which might be a negative feature if your turnover is high. Lastly, the contribution ceiling for SIMPLEs is relatively lower than other retirement plan options.
- Simplified Employee Pension Plans—or SEPs, for short—have actually been used by small businesses, particularly self-employed individuals and professional partnerships, for years. SEPs are ideal for those who want to shelter a significant amount of income from taxes and save for retirement through a plan that’s fairly easy to set up and maintain.
- Unlike SIMPLEs and 401(k) that permit employee deferrals, SEPs don’t. You, as the employer, can put in a maximum of 25% of employee’s compensation or $49,000 in 2009, whichever is less. In addition, the percentage contributed on behalf of each worker must be the same. If you’re a self-employed individual with no employees, the maximum you can put into your own account is 20% of your adjusted net profit.
- Contributions made to a SEP are discretionary and may be skipped in any given year. SEPs are one of the retirement plans we’ll discuss today that permit social security integration. Retirement plans that are integrated with Social Security use a contribution formula that takes employees’ Social Security payments into account. Using such a formula allows higher paid employees to receive a higher contribution percentage. So if you’re goal is to maximize retirement plan benefits for key members of your staff, Social Security integration can be a strong plus. Like SIMPLEs, SEPs are easy to establish and maintain. They require none of the government reporting that 401(k)s do.
- Generally, the same percentage of compensation must be contributed for all participants including you, as the employer. If you choose to use an integrated contribution formula, you and your higher paid employees may be able to receive a larger portion of the plan’s assets. It’s important to note that employees are immediately vested in their SEP accounts, which means that when they leave they can take their contributions with them. The SEP’s eligibility requirements also make it difficult to exclude part-timers. This feature may be a potential minus for some employers. And, of course, since SEPs are entirely funded by the employer, employees can’t share in the responsibility by adding their own dollars to their accounts. Finally, SEPs require some top-heavy testing and possible top-heavy contributions to make sure they don’t unfairly favor higher-paid employees.
- OppenheimerFunds Payroll Deduction IRA offers all business owners the opportunity to provide a valuable employee benefit without expensive administrative costs. This is the only retirement plan with no set-up costs, no employer contributions and no employer-based administrative fees.
- This plan allows employees to have a portion of their paycheck automatically deposited into an OppenheimerFunds IRA. It’s entirely up to your employees if they want to put money away in their IRA. IRA contributions for 2009 are limited to $5,000 plus $1,000 in catch-up contributions for workers age 50 or older. Employees can choose to invest in an OppenheimerFunds traditional IRA, Roth IRA or both.
- This is a low cost plan alternative for employers because employees fund their IRA accounts through payroll deductions. In addition, there are no administrative fees or expenses to the employer. Payroll deduction IRA are simple to establish and maintain. There are no discrimination testing or government reporting requirements.
- Compared to other retirement plans, the maximum annual contribution to a Payroll Deduction IRA is low. Like all IRA products, loans are not permitted within this plan.
- Like SIMPLEs, 401(k)s allow employees to make salary deferral contributions with pretax dollars. Currently, they can contribute up to $16,500—or 100% of their compensation, whichever is less.
- As the sponsor, you can match these deferrals based on a variety of formulas, although the match is totally discretionary. This is in sharp contrast to many other retirement plans that require employers to make contributions to the plan. Total employer and employee contributions are limited to the lesser of 100% of compensation or $49,000 for 2009.
- 401(k)s have been extremely popular among both smaller and larger employers for years. They offer a great deal of employer flexibility and are viewed as a very attractive benefit by employees, with good reason. Vesting schedules are available for 401(k)s. In addition, the employer can set eligibility standards that employees must meet before they are permitted to participate in the plan. Unlike plans such as SEPs and SIMPLEs, loans and hardship withdrawals are permitted.
- Although they offer so much flexibility, 401(k)s are highly regulated and employers must perform certain tests to ensure their plans remain in compliance. The reason for testing is to help ensure the plan does not discriminate in favor of highly compensated employees. 401(k) plans and other retirement plans must be periodically evaluated to ensure that they don’t unfairly favor highly compensated employees or the owners of the business. If they do, you’re usually required to make some changes, like returning contributions of highly compensated employees, or contributing additional funds on behalf of non-highly compensated employees. Some of you may be thinking what is a highly compensated employee? The IRS defines it as any employee earning $110,000 or more in gross compensation and ranking among the top 20% in pay for the entire company. For these and other reasons, the administration and reporting for 401(k)s can be complex. Another noteworthy consideration is cost. 401(k)s are generally more expensive to maintain and administer than other retirement plan options.
- The traditional safe harbor 401(k) is a solution for clients who like the flexibility associated with 401(k) plans but not the cumbersome administration. Generally, these plans work well for employers with low employee participation and who have owners and highly compensated employees that can’t contribute what they would like to based on the non-discrimination rules.
- As the employer, you can handle your funding of the plan in one of two ways If you choose to use the matching contributions, you’re required to match 100% of each participant’s contributions up to the first 3% of compensation, and 50 cents on contributions on the next 3-5% of compensation. Enhanced matching contributions are available as well. The non-elective contribution formula requires you to make a contribution equal to 3% for all eligible employees, even if they don’t participate in salary deferrals.
- With a Safe Harbor 401(k), nondiscrimination and top-heavy testing is automatically satisfied for Safe Harbor employer and employee deferrals. This means that owners, key managers and other highly compensated employees are eligible to defer the maximum, even if the non-highly compensated employees don’t participate, or participate at very low deferral levels. Finally, the Safe Harbor 401(k) offers all the same benefits as the Traditional 401(k) plan option.
- Unlike the traditional 401(k), Safe Harbor employer contributions are mandatory. You must make either a matching contribution or non-elective contribution on behalf of your employees. Like SIMPLEs and SEPs, contributions are immediately 100% vested. As the employer, you must meet notification requirements. Generally, before an existing 401(k) plan or Profit-sharing plan can take advantage of the safe harbor rules, a 30-day notice must be issued. Existing 401(k) plans must contain the appropriate safe harbor language prior to the first day of the plan year. Existing Profit-sharing plans must amend their plan three months prior to the end of the plan year, October 1 for calendar-year plans. Generally, the 30-day notice also must be issued each year the employer wants to use Safe Harbor.
- What’s the difference between a SIMPLE IRA versus a Safe Harbor 401(k)? To begin with, a Safe Harbor 401(k) is generally appropriate for any business with 25 or more employees, while only employers with 100 or fewer eligible workers may establish a SIMPLE IRA. The administration associated with both a SIMPLE IRA is low. There are no testing or government filing requirements. SIMPLEs are generally less expensive than Safe Harbor 401(k) plans. There is a $15 annual participant fee for a SIMPLE IRA. While employer contributions are mandatory in both a SIMPLE IRA and Safe Harbor 401(k), the employer may contribute more to a Safe Harbor 401(k) than a SIMPLE IRA. In addition, an employee may contribute the lesser of $10,500 or 100% of compensation to a SIMPLE in 2008. A Safe Harbor 401(k) permits employees to contribute 100% of income up to $16,500 for 2009. Lastly, Safe Harbor 401(k)s offer more flexibility than SIMPLEs including loans, hardship withdrawals and the option to restrict eligibility. If your client is looking for flexibility and the ability to put more money away for a retirement plan and doesn’t mind the cost, a Safe Harbor 401(k) may be the better option. On the other hand, if your client is looking for a low cost plan option, the SIMPLE IRA may be the way to go .
- The new OppenheimerFunds Single K Plan SM is a new retirement savings alternative for owner-only businesses. This includes owners with immediate family members. It also includes owners with part-time or seasonal employees who may be excluded from the plan. Furthermore, if you have highly compensated employees only, you may be eligible for the Single K Plan. Businesses can be incorporated (partnerships and corporations) or unincorporated (sole proprietorships).
- In 2008, the employer can make a tax-deductible contribution up to 25% of compensation. In addition, salary deferrals equal to the lesser of 100% of employee’s compensation up to $16,500 can be made to the Single K Plan SM . Furthermore, individuals age 50 or older may contribute an additional $5,000 in salary deferrals beyond the $16,500 deferral limit. Salary deferral contributions are counted toward the $49,000 limit. Catch-up contributions do not count towards the $49,000 limit. Overall limits cannot exceed 100% of pay based on the first $245,000 of compensation, up to $49,000.
- A Single K Plan offers the opportunity to save for retirement through Traditional (pre-tax) and/or Roth (after tax) investing Unlike a Roth IRA, participants may contribute to a Roth 401(k) regardless of how much they earn. The Roth 401(k) feature is available for salary deferral contributions only. Profit sharing contributions are treated as Traditional (pretax) 401(k) contributions. There is a single maximum 401(k) contribution limit for both Roth 401(k) and Traditional 401(k) contributions. $16,500 in 2009, plus $5,000 age 50 catch up Salary deferral contributions may be split between Traditional 401(k) and Roth 401(k) contributions within these limits
- Salary deferrals are a critical feature that set this product apart from other plans designed for a self-employed business owner. This product permits employers to contribute substantially more to the plan than other alternatives. For example, a business owner earning $80,000 can make a deductible employer contribution up to 25% of compensation or $20,000 in this example. Additionally, the owner can defer up to $16,500 for a total contribution of $36,500. Of course, if the business owner is age 50 or older, they can contribute an additional $5,000 for an overall contribution of $41,500. Single K Plans SM are inexpensive to maintain. There is a $15 annual maintenance fee charged to the account. Loans and hardship withdrawals are permitted in Single K. Also, the Roth 401(k) feature is available with our Single K. Last, these plans are simple to administer and generally don’t require 5500 filing or testing unless assets reach $250,000 or there are non-owner employees in the plan.
- This plan was really designed with owner-only businesses in mind. To keep it simple and avoid testing and government reporting requirements, this product is not available for businesses with employees.
- Profit-sharing plans, which are funded solely by employer contributions, are a good choice if you like the features of a SEP, but want more control over your plan’s eligibility and vesting.
- You as the employer, can put in a maximum of 100% of employee compensation or $49,000 for 2009, whichever is less. In addition, the percentage contributed on behalf of each worker must be the same. If you’re a self-employed individual with no employees, the maximum you can put into your own account is 20% of your adjusted net profit.
- Contributions to a Profit-sharing plan are completely discretionary. In fact, they don’t even have to bear any relationship to profits, and may be skipped altogether in a given plan year. The contribution limits associated with a Profit-sharing plan are high when compared to other plans. In addition, social security integration is permitted in this plan. Profit-sharing plans allow you to exclude most part-time and seasonal workers. It also gives you some flexibility in structuring a vesting schedule as a means of keeping assets in the plan and out of the pockets of employees who stay with you a short period of time. In addition, it includes provisions for loans and hardship withdrawals.
- In general, if the employer chooses to make a contribution to the plan, the same percentage of compensation must be contributed for all participants. The added flexibility and control that come with a Profit-sharing plan do have a price—more administration, including top-heavy testing and IRS Form 5500 filing. Note, too, that Profit-sharing plans don’t permit employee contributions unless coupled with a 401(k) feature.
- OppenheimerFunds makes Profit-sharing plans available in several variations that are suitable for a wide variety of clients, including corporations, partnerships, and sole proprietorships. Age-weighted, New Comparability and Super Comp plans offer all the benefits of traditional Profit-sharing plans, plus greater flexibility. Testing is based on projected benefits at retirement, not on allocations of contributions to the plan. This means that you no longer are required to contribute the same percentage of pay for all participants. In fact, larger contributions can go to older, higher paid owners and employees. Briefly, this is how each of these plans work:
- Age-weighted plans are suitable for owners and principals of small companies who are older and paid better than the rest of their employees, who require a plan with a flexible contribution schedule and who are concerned that they get the largest portion of the total plan contributions.
- The factors used to determine the Age-Weighted contribution allocation include the participant’s current age, the plan’s retirement age, which is usually age 65, the participant’s years to retirement, the present value of dollars at retirement based on an assumed interest rate--between 7.5% and 8.5%--and finally, the participant’s current compensation.
- The premise behind this method of nondiscrimination testing is the time value of money. A dollar invested today by a younger employee will be worth more at normal retirement age than the same dollar similarly invested by an older employee. So if a plan is designed to provide benefits that will be equally valuable at retirement age, then it must provide a higher contribution for an older worker than for a younger worker. Sounds discriminatory, but it’s legitimate.
- Contributions for older employees may be considerably higher than those made for younger employees. Like traditional Profit-sharing plans, a business may contribute the lesser of 100% of participant’s annual compensation or $49,000 for 2009. Age-weighted plans have the same flexibility as traditional profit sharing plans. Contributions are discretionary and vesting schedules are permitted.
- There are no prototype documents available. This means that start up costs are slightly higher, due to the need for IRS submissions. Also, since the annual allocation formulas are more complex than with a traditional Profit-sharing plan, the administration associated with an Age-weighted plan or any cross-tested plan will be slightly higher.
- The best candidates for New Comparability plans are companies with owners who seek contribution flexibility, who want to maximize their share of the plan contributions, and who are older than the rest of their workforce.
- The New Comparability Profit-sharing plan takes Age-weighted a step further. These plans go beyond age and use specific employee classifications when calculating plan contributions. Under these arrangements, participants are divided into two or more classes, and these classes can be based on any reasonable criteria, such as ownership in the company, job classification, length of service with the company or age.
- What makes these plans so compelling is that the contribution formulas allow for larger contributions to be made for one class than for another class of participants. In fact, if the circumstances are right, the result is usually extremely high contributions for the favored group, usually the owners, and more minimal contributions for everyone else.
- New Comparability plans share the same potential drawbacks as the Age-weighted Profit-sharing plan. No available prototype documents means slightly higher start-up costs due to the need for IRS submissions. And again, since annual allocation formulas and testing procedures are complex, the annual administration associated with a New Comparability plan is somewhat higher than a traditional Profit-sharing arrangement.
- Super Comp plans are a combination of Safe Harbor 401(k) plans with New Comparability Profit-sharing plans. The best candidates for Super Comp are companies that have consistently failed discrimination testing, make contributions of 5% or more, want to max out contributions for owners and highly compensated employees and want a larger portion of plan contributions for themselves. Speaker: (Tab back to Safe Harbor plans if you need to review the details).
- Super Comp delivers to the owners, principals and Highly Compensated employees the best features of these two plans. There are no discrimination tests for Safe Harbor contributions, so the higher paid employees can max out on their salary deferrals. The New Comparability contribution will cover any top heavy requirements. And finally the highly compensated employees will continue to receive the maximum Profit-sharing allocations while contributions for the rank and file employees are minimized.
- No available prototype documents means slightly higher start-up costs due to the need for IRS submissions. You must make either a Safe Harbor employer matching contribution or non-elective contribution on behalf of your employees. 401(k) salary deferrals and Safe Harbor employer contributions are immediately 100% vested. You will also need to provide the safe harbor notice to notify your employees, as was discussed earlier.
- All the plans discussed so far are defined contribution plans that offer a variable benefit at retirement, depending on how the plan’s investments perform. Defined benefit plans, as their name implies, provide a specific benefit at retirement. The right candidates for defined benefit plans are small, high revenue companies and professional groups and for older business owners who have never implemented a retirement plan and now want to accumulate a large level of assets in a short time.
- Defined benefit plans allow for higher contributions than any other qualified plan. The maximum retirement benefit is 100% of compensation up to an annual maximum of $195,000 in 2009. Defined benefit plans take the guesswork out of retirement. Employees will know how much they can expect to receive at retirement. Another nice feature of defined benefit plans is that it’s possible to contribute the maximum of 100% of compensation or $49,000 to a defined contribution plan and still fund a defined benefit plan.
- Defined benefit plans are more expensive to establish and maintain than the other plan types we have discussed. In addition, you must make contributions to the plan on a quarterly basis. And regardless of how the plan’s investment perform, benefits must be paid to employees according to the plan’s defined benefit formula.
- Now that you have a basic understanding of the kinds of plans that might be appropriate for your needs, I’d like to talk about one more misconception that many business owners have. This is the myth that says it doesn’t matter who your retirement plan provider is. The truth is, it matters a great deal. As a small business owner, you take enough risks right now. You don’t need to take chances with your retirement, too, by placing your trust in the wrong organization.
- So, what should you look for in a provider? I would suggest three considerations that are absolutely critical: The provider’s experience, as well as the principles that stand behind its ability to deliver what it offers…the quality and range of its investment offerings…and the convenience, ease and service that are part of its retirement vehicles.
- Underlying this commitment are six core principles that we believe form the foundation for long-term investor success. Together with our unique Investment Approach, these simple tenets represent the spirit and driving force behind what we believe is The Right Way to Invest : Insist on solid, long-term performance Do what you say you’re going to do Embrace a disciplined, collaborative approach to investing Know the difference between risk and risky Encourage financial planning and professional advice Be user friendly.
- The Oppenheimer funds offered in any of the OppenheimerFunds retirement plans might include some or all of the following types of mutual funds Cash Aggregate Income High Yield Income Large-cap Value Large-cap Growth Small-/Mid-cap Growth Small-/Mid-cap Value Global/International Equity
- Finally, you want a provider to offer the kind of convenience and plan support that make it easy for you to reap all the benefits a retirement plan offers. Here, too, OppenheimerFunds strives to maintain a higher standard. OppenheimerFunds retirement plans include a whole package of support services that promote agreement, simplicity, ease and employee appreciation of your plan. For example, your participants will receive regular account statements to help them monitor investment growth, and enjoy fund exchange privileges that make it easy for them to adjust their investment allocations. OppenheimerFunds internet site and voice response system offers 24-hour access to account information and the ability to perform certain transactions. Finally, we make sure plan participants receive regular communications that highlight the value of the benefits you’re making available. And our user-friendly educational materials will build their understanding of sound retirement planning and smart investing principles. Remember too that, in partnership with OppenheimerFunds, I’ll not only help you identify the plan that best suits your needs—I’ll also help you chart a realistic course for helping meet all those financial goals critical to your dreams for the future.
- I know I’ve given you a lot of information in a short amount of time. If nothing else, I hope I’ve convinced you of two things: First, that there’s really no good reason today to pass up the important advantages a retirement plan offers and, second, that the value and service I can offer you in partnership with OppenheimerFunds clearly makes one of OppenheimerFunds retirement plans your best choice. Thanks very much for your attention. Now I’d be happy to answer any of the questions you have so far.