It’s the kind of benefit employees are looking for — a profit sharing/401(k) plan that effectively matches employee contributions dollar for dollar up to 4 percent of total employee compensation.
And the 77 employees at Digital Day, a Fairlawn-based provider of corporate Web solutions, have found it. Jacqueline Alt, manager of internal operations and human resources, doesn’t think of the plan as a luxury. In fact, she considers it a necessity in today’s top job market.
“In our industry, we have to be competitive for human resources,” she says. “You have to have not only a 401(k) plan, but a really good one in place. The profit sharing plan is another major issue with the employees. They’re looking for the best place to be.”
Just how does a small business provide such perks? It’s not as cost-prohibitive as it sounds, according to Mario Dolciato of Retirement Benefit Systems, an Akron-based company that specializes in designing, administering and investing retirement plans for smaller companies.
He says it’s actually quite affordable to set up a retirement plan, and, in most cases, it is the employer who decides just how generous he or she will be, from matching employee contributions dollar for dollar to kicking in nothing at all.
“When we design the plan, we talk with a business owner and find out what they want out of a retirement plan,” Dolciato says. “Every retirement plan out there is different. There are things that you can design in the plan to work for each company — eligibility can be different, the vesting schedule can be different. If the business changes in the future, we amend the plan to allow other things to happen.”
While plans differ from company to company, Dolciato says the most popular types of qualified retirement “products” offered by the IRS can be narrowed to the following. He explains exactly what they are, how they’re set up, and what they cost to implement, fund and administer.
The S.I.M.P.L.E. IRA plan. Like the individual retirement account so many Americans are familiar with, this IRA allows an individual to defer and invest a portion of pre-tax income every year. However, an employee can sock away up to $6,000 a year — three times the Internal Revenue Service’s $2,000 limit for the Plain Jane IRA.
The catch? Each year the employer must match 3 percent of each participating worker’s total annual compensation or 2 percent of every worker’s total annual compensation, regardless of whether they contribute to their IRA or not. All contributions are vested immediately.
Dolciato says this is a good option for businesses with 10 or fewer employees. To set it up, employers need only contact a registered securities representative.
“There’s no IRS reporting, no administration, no cost for administration,” Dolciato adds.
Employees, who are able to choose the mutual funds in which they invest their money, pay an annual custodial fee of about $30 to the investment company, just as they would if they’d opened a regular IRA of their own.
The profit sharing/401(k) plan. Dolciato recommends the profit sharing/401(k) plan for businesses with more than 10 employees. The profit sharing component, as the name suggests, is funded by employer contributions only.
The plan document can be worded so that such contributions are made at the employer’s discretion from one year to the next.
“The business owner can decide at the end of the year if they want to put $50,000 in, $100,000 in, or zero,” Dolciato says.
Even if a business enjoys a year of record-breaking success, its owners may decide to contribute nothing.
The 401(k) component is made up of employee contributions and matches made by the employer. The IRS allows each employee to contribute a maximum of $10,500 pretax income annually (a figure indexed each year). A well-worded plan document allows the employer to make contributions at his or her discretion.
Some companies, like Digital Day, do commit to matching a percentage of employee contributions annually.
“But we like to make the document read, ‘We’ll put a match in if we’d like,'” he says.
Such wording prevents employers from making legally binding promises they can’t afford to keep. And even if the employer decides to contribute nothing, the plan still offers employees the opportunity to defer and invest pretax income.
Retirement Benefit Systems charges a one-time fee of $800 to draw up a plan document. Annual administration charges are $1,100 plus $42 for each employee.
The rates, Dolciato says, are comparable with those of competitors. There are also investment costs, or fees charged by mutual funds, to consider. But setting up a profit-sharing/401(k) plan for larger groups allows a business to control how much it will contribute and when employees are vested for those contributions.
Employees, of course, are immediately vested for the balance produced by their own money, but a vesting schedule dictates when they’re fully vested for employer contributions. Dolciato says workers are typically vested in 20 percent increments for each year of service and are fully vested after six or seven years.
The money purchase plan. A money purchase plan is a pension plan fully funded by the employer. Because it is a pension plan, it must be funded for an amount stipulated in the plan document.
“If you write in your money purchase plan that you’re going to put 10 percent (of an employee’s total annual compensation) in for everyone, every year, then you’re going to do it,” Dolciato says.
Retirement Benefit Systems charges a one-time fee of $800 to draw up a plan document. Annual administration charges are $1,000 plus $32 for each employee. Dolciato says some competitors charge more to come on site and talk with employees so they can each invest their own funds. He says the money spent is worth it, for it releases the employer from the fiduciary liability inherent in what he calls pooled accounting, or putting the money in one pot of investments.
The employer is responsible for the funding only. How to reach: Retirement Benefit Systems, (330) 666-8883
