What Should a Small-Business Owner Gather Before Comparing Retirement Plans?
Maybe you’re thinking about the people who kept things running when you were stretched thin and how you could help them save more for retirement. You might want to put more away for yourself, too. Then there’s the question of how it would feel to carry another obligation through a slow year.
Before you compare estimates, write down what you want employees to gain and how much you’d be comfortable putting toward the benefit in a slow year. A plan specialist uses the employee census, a roster with details about your workforce, to estimate what employees could receive and what the business would pay.
What do you want the benefit to do for employees?
You might want everyone who qualifies to receive a meaningful employer contribution, or you may be wondering what would make staying more attractive to people who are hard to replace. Be clear about which of those goals matters to you. Consider what employees value, too. Someone who needs more predictable hours or pay may put less weight on a benefit they’ll use years from now.[1][2]
Say what you want for yourself, too. If you hope to step back eventually, saving more while the business is doing well might matter as much as retaining staff. Tell your advisor and plan specialist which goals you’d protect first if the estimates show you can’t meet them all at once. The specialist can explain what the plan’s eligibility and allocation rules permit.
What does the employee census help you see?
Ask the plan specialist for a secure worksheet and confirm which reporting period to use. The first estimate often starts with ages or birth dates, compensation, hire dates and service information. Flag owners and related businesses, part-time staff and contractors so the specialist can determine who must be considered. Share current plan terms and employer contributions if you already have a plan. Ask which details they need before collecting sensitive identifiers.[3][4]
Ask for both estimates to use the same roster and compensation period. Flag any employee hours that payroll still needs to confirm, along with any changes to your own pay. An estimate can look more affordable when it leaves out people who later turn out to be eligible. You want to see what employees could receive and what the business would pay in total.
What would each option ask of the business?
With discretionary profit sharing, the business can generally decide whether and how much to contribute for a year. The plan’s formula governs how it divides any contribution. A cash balance plan is a type of pension that defines a benefit by formula. An actuary assesses the funding needed, and the business may still have to contribute in a lean year.[5][6]
A larger contribution might feel manageable in a strong year. You might feel differently about committing to fund a plan if revenue drops. Ask the specialist to walk through what each approach would mean if a customer left or you cut back your own hours. Use a slow year that could realistically happen in your business.
Same census, different commitments
Discretionary profit sharing
Employees receive an allocation under the plan formula if the business makes a contribution. In a slow year, the business can generally reduce or skip a discretionary contribution.
Cash balance pension
Employees earn a benefit under the plan formula. An actuary determines funding needs, and the business may have to contribute even in a slow year.
Ask what staff could receive and what the business would pay, including fees. Have the specialist show how those amounts could change in a slow year.
Dovetail Principle: The Reason Behind a Goal Can Change the Plan
If your priority is to give employees a benefit they can count on, look closely at what each proposal would provide for them. If you want to save more when the business can afford it, look at how much flexibility you’d have from year to year. Say which matters most and where you need room before you compare costs.
Bring the census, the terms of any existing plan and an estimate of what the business could put toward benefits in a slow year. Before you choose, ask your plan specialist which figures are preliminary, what needs to be verified and what the business would be committing to.
You may find that a simpler contribution does what you want for the team. Or you may want to see what a pension could add to your current plan. Before committing, make sure you can explain what employees could gain and feel comfortable with what the business would have to fund.
Related Reading: How Should You Plan for a Final Profit-Sharing Contribution After You Leave? explains how an employee can verify an employer contribution when leaving a job.
