How to Set-Up a Simple Retirement Plan

Are you a smaller firm?  How have you set-up your retirement plan?  Is it a bit cumbersome to run? In our experience, smaller employers, generally speaking, don’t want to hassle too much with the administration of their retirement plan. They would like to be able to easily understand it and communicate it to prospective and new employees.  Considering their limited staff and in-house expertise on benefits, this would make sense.  However, it does not necessarily mean that you have to waive all the features of your plan.

Here are some of our recommendations for features that might help simplify your plan:

Immediate eligibility for both employee contributions and employer funding. This is simple to communicate and administer.  It would work for an organization that has somewhat stabilized their employee growth. If you are making employer contributions, this will be more costly as staff will receive funding from you right when they start.  This will eliminate the need track employee hours and the need to have an entry date to the plan for new hires.

No service requirement to receive employer funding each year.  Once an employee starts in the plan, they are always in the plan.  They don’t have to work a certain number of hours every year or have to work on December 31st of each year to receive the employer contribution.

Immediate vesting.  Employees are always fully vested of the employer funding. In my 20 years of experience, I don’t know of a single employee client that I worked with that stayed at a job due to the vesting schedule.  I am sure it happens, but I don’t really believe that it keeps employees around that want to leave your company.  Besides, do you really want them there if they are going to leave once they are vested?  Of course, the goal could just be to reduce costs by sending some money back to the employer through the forfeiture account when employees leave.

Allow for loans, hardship withdrawals, and in-service withdrawals.  You should allow these distributions from the employee account and not the employer account.  (However, the amount that can be borrowed can be calculated by combining the funds in the employer account with the employee account).  This might seem to complicate the plan, but that has not been our experience at all. These options can be easily explained to any participant if they are in a situation where they need to consider accessing their money.  In addition, we have not seen any meaningful abuse of withdrawals by our clients over the years.

We believe these are the key features that affect the administration of your plan.   There are some other features that each employer will review when setting up their plan, but they will have less impact on plan administration.  Keep in mind, too, that all of these decisions and plan features come with trade-offs, typically in the form of greater cost.  But in many smaller employers, these costs will be minimal.  And every employer is unique in what they want to get out of their plan, so make sure these recommendations work for your firm.