choosing a small business retirement plan

[simple girl]

Hello all! We have a good friend who has his own business (health care practice) and is interested in getting his retirement plan going. He would like to learn about his options to make an educated decision instead of just giving the reigns completely to his accountant. I offered to post here to pick your minds for information. I have no background with small business retirement planning (I have plenty with our own personal retirement planning), so he and I will be facing a steep learning curve on this topic...so please be patient and kind with your responses, especially if I ask a very obvious question!

He bought this practice I believe 3 or 4 years ago. His practice is thriving and growing. He is in his late 30's and does not have any personal retirement funds yet. He is married with 3 children.

He has 7 employees.

I've been reading about small business retirement plans, but honestly, my head is kind of swimming with trying to figure out what type of plan would be most advantageous for him to set up. We looked over what is offered at Vanguard, and we also looked at this tool (IRS Retirement Plans Navigator), but the decision of what type of plan to choose is still clear as mud to me. I looked at this table (IRS Retirement Plans Navigator) and here are my questions so far:

1) Payroll deduction IRA
- only allows $5000 in contributions. This doesn't seem like nearly enough $ to fund anyone's retirement over the years.

2) SEP
- this allows you to put away a huge chunk of change (up to $50K or 25% of the participant's income, whichever is less). It seems like it would be a great option, especially since it is not required every year, so it offers flexibility if the business is not doing as well one year. However, I read that if the self-employed person does have employees, all employees must receive the same benefits under a SEP plan. So, if he puts away 25% into an IRA for himself, he then has to do this for all of his employees, right? Isn't that awfully expensive and counterproductive? Yes, this I'm sure is stupid question #1, and you all will make the answer clear to me!

3) simple IRA
- requires the employer to make contributions every year (albeit a much smaller percentage than the SEP), but it does lock you in to doing this, so not sure about starting out with this...? Also, can only put away $11,500 which again doesn't seem like a way to really sock away some coin and reduce taxable income significantly. Comments?

OK, so I stopped looking further at the options listed on that IRS site, since Vanguard didn't go into them and this was already enough information to take in. Should we consider one of the other options as well? (I didn't look at the Individual 401K option listed on Vanguard b/c he has employees.)

[LOL!]

With that many employees, I would also look at just having a 401(k). For help with setting up a low-cost 401(k) plan, check out:
Wiki article link: Setting up a 401(k) plan

[farmerEd]

I am sure the rules have changed quite a bit since I setup my corporation and retirement plan, so he is going to want to get more upto-date info, but 20 years ago, a Keough was the best choice for me at the time and it allowed me to deduct a very generous 25% of my salary (upto about 50K a year if I remember correctly) to my retirement plan, and is ultimately what led me to FI and then RE.

However, the problem your friend is going to have(as you have found out) is that most, if not all, retirement plans don't allow generous plans for the owners and less generous plan for the lowly employees - so being generous to yourself, gets very, very expensive. He may be forced to have a moderate retirement plan at work, but pay himself a high salary and save/invest the rest in after-tax accounts.

[simple girl]

Quote:

Originally Posted by LOL! With that many employees, I would also look at just having a 401(k). For help with setting up a low-cost 401(k) plan, check out: Wiki article link: Setting up a 401(k) plan

LOL, what are the benefits of setting up a 401(k) vs doing a SEP or SIMPLE IRA? What are the cons?

[jclarksnakes]

You do not say if he is willing to do employer match of some of employee contributions. If the answer is yes then a 401k seems like the better idea to me. However with just 7 employees it would probably be a good idea to talk to them first. There is no point in going to the trouble of setting up a plan if they are all "spend it as fast as they get it, there is no tomorrow types". It is unbelievable to me but there are people who do not even contribute up to the amount of employer match on their 401s.

[simple girl]

Quote:

Originally Posted by farmerEd I am sure the rules have changed quite a bit since I setup my corporation and retirement plan, so he is going to want to get more upto-date info, but 20 years ago, a Keough was the best choice for me at the time and it allowed me to deduct a very generous 25% of my salary (upto about 50K a year if I remember correctly) to my retirement plan, and is ultimately what led me to FI and then RE. However, the problem your friend is going to have(as you have found out) is that most, if not all, retirement plans don't allow generous plans for the owners and less generous plan for the lowly employees - so being generous to yourself, gets very, very expensive. He may be forced to have a moderate retirement plan at work, but pay himself a high salary and save/invest the rest in after-tax accounts.

Thank you - will look into the Keough further. Your point about being generous to yourself requiring lots of additional expense is one of my main questions - do you end up shooting yourself in the foot? Not that the employees don't deserve retirement options!!! I'm a lowly employee, so I understand that position for sure! LOL. It makes you wonder at what point it becomes more advantageous for an employer to do what you said with the after-tax accounts.

[simple girl]

Quote:

Originally Posted by jclarksnakes You do not say if he is willing to do employer match of some of employee contributions. If the answer is yes then a 401k seems like the better idea to me. However with just 7 employees it would probably be a good idea to talk to them first. There is no point in going to the trouble of setting up a plan if they are all "spend it as fast as they get it, there is no tomorrow types". It is unbelievable to me but there are people who do not even contribute up to the amount of employer match on their 401s.

I don't know the answer to that question - but I think it will depend on how much that costs and what the advantages are for his business to do any matching. If yes, why is a standard 401K be the better option? (Oh and thanks for the tip on assessing the employees interest...that is a key point).

[jclarksnakes]

Quote:

Originally Posted by simple girl I don't know the answer to that question - but I think it will depend on how much that costs and what the advantages are for his business to do any matching. If yes, why is a standard 401K be the better option? (Oh and thanks for the tip on assessing the employees interest...that is a key point).

Not sure I have the right answer but I was thinking that employer match of contributions would not be an option with an IRA.

[panacea]

Quote:

Originally Posted by simple girl Hello all! We have a good friend who has his own business (health care practice) and is interested in getting his retirement plan going. He would like to learn about his options to make an educated decision instead of just giving the reigns completely to his accountant. I offered to post here to pick your minds for information. I have no background with small business retirement planning (I have plenty with our own personal retirement planning), so he and I will be facing a steep learning curve on this topic...so please be patient and kind with your responses, especially if I ask a very obvious question! He bought this practice I believe 3 or 4 years ago. His practice is thriving and growing. He is in his late 30's and does not have any personal retirement funds yet. He is married with 3 children. He has 7 employees. I've been reading about small business retirement plans, but honestly, my head is kind of swimming with trying to figure out what type of plan would be most advantageous for him to set up. We looked over what is offered at Vanguard, and we also looked at this tool (IRS Retirement Plans Navigator), but the decision of what type of plan to choose is still clear as mud to me. I looked at this table (IRS Retirement Plans Navigator) and here are my questions so far: 1) Payroll deduction IRA - only allows $5000 in contributions. This doesn't seem like nearly enough $ to fund anyone's retirement over the years. 2) SEP - this allows you to put away a huge chunk of change (up to $50K or 25% of the participant's income, whichever is less). It seems like it would be a great option, especially since it is not required every year, so it offers flexibility if the business is not doing as well one year. However, I read that if the self-employed person does have employees, all employees must receive the same benefits under a SEP plan. So, if he puts away 25% into an IRA for himself, he then has to do this for all of his employees, right? Isn't that awfully expensive and counterproductive? Yes, this I'm sure is stupid question #1, and you all will make the answer clear to me! 3) simple IRA - requires the employer to make contributions every year (albeit a much smaller percentage than the SEP), but it does lock you in to doing this, so not sure about starting out with this...? Also, can only put away $11,500 which again doesn't seem like a way to really sock away some coin and reduce taxable income significantly. Comments? OK, so I stopped looking further at the options listed on that IRS site, since Vanguard didn't go into them and this was already enough information to take in. Should we consider one of the other options as well? (I didn't look at the Individual 401K option listed on Vanguard b/c he has employees.)

He should contribute to IRAs no matter what- nondeductible if he has another plan. Yes, he'd have to bring his employees with him with the SEP so it might not be a good idea. SIMPLE could be an option- can do $14,000 I think with the "employer" match and would also have to provide something to the employees but pretty nominal compared to the SEP and only to those that participate in the plan. The 401(k) seems like the best option- Can contribute $17,000 for 2012. May also be able to work in a profit sharing piece to further increase the contribution (maybe $50,000 or so) but that's where I start to get a little "iffy" on the subject without looking some things up.

[simple girl]

I really appreciate the input thus far. It seems like many are suggesting a standard 401K would be better for him to set up, despite it costing more to create and manage.

A fundamental question I have is, why would any employer offer the SEP if he has to totally fund the employee's accounts? It seems to offer no advantages for an employer who has more than just himself or his spouse employed. Am I missing something here?

[panacea]

Quote:

Originally Posted by simple girl I really appreciate the input thus far. It seems like many are suggesting a standard 401K would be better for him to set up, despite it costing more to create and manage. A fundamental question I have is, why would any employer offer the SEP if he has to totally fund the employee's accounts? It seems to offer no advantages for an employer who has more than just himself or his spouse employed. Am I missing something here?

True, it's used most often for a business where the owner is the only employee.

[thefinancebuff]

Quote:

Originally Posted by simple girl what are the benefits of setting up a 401(k) vs doing a SEP or SIMPLE IRA? What are the cons?

SEP is out of the question as mentioned above. SIMPLE IRA is fine. Low admin cost but the limit is lower ($11,500 a year). A 401k will cost $1,500 a year (Employee Fiduciary) but the limit is higher ($17,000 a year). So it comes down to whether the owner is willing to pay more to defer more and offer the employees a better plan at the same time. If the employees will participate at a high rate, the owner may be able to get away with not offering a match.

[simple girl]

Quote:

Originally Posted by panacea True, it's used most often for a business where the owner is the only employee.

Thank you for the confirmation!

Quote:

Originally Posted by thefinancebuff SEP is out of the question as mentioned above. SIMPLE IRA is fine. Low admin cost but the limit is lower ($11,500 a year). A 401k will cost $1,500 a year (Employee Fiduciary) but the limit is higher ($17,000 a year). So it comes down to whether the owner is willing to pay more to defer more and offer the employees a better plan at the same time.

Thank you very much for this information - that really spells it out clearly! Note my friend is reading these threads and is also very thankful to all of the input from everyone. I have just looked up Employee Fiduciary (who of course I knew nothing about: Employee Retirement Plans, 401k Investments, ETFS, Small Business 401k) and have started reading (it's long!) this thread on the Bogleheads board (Bogleheads • View topic - A Review of Employee Fiduciary's 401(k)). This answered my next questions about how do you go about setting up a 401K. Sounds like if you don't have $3M in assets you can't go directly with Vanguard and that Employee Fiduciary offers the lowest admin cost to provide a 401K. Of course we need to look into this further since the thread is from 2007 and things may have changed since then, but this is a great lead. Also, my friend may decide the SIMPLE IRA is, well, simpler, and go with that option instead.

Quote:

Originally Posted by LOL! With that many employees, I would also look at just having a 401(k). For help with setting up a low-cost 401(k) plan, check out: Wiki article link: Setting up a 401(k) plan

LOL, wanted to thank you for this link as well - still have lots of information to process, but we so appreciate the guidance!

Quote:

Originally Posted by thefinancebuff If the employees will participate at a high rate, the owner may be able to get away with not offering a match.

Can you explain what you mean here? I do not understand why/when the employer must or must not offer a match with the 401K.

[PaddyMac]

I also agree that a 401k plan would be worthwhile. Call Vanguard for a chat. Their website information can be explained more clearly by a sales rep. I found inconsistencies in their website language when opening a Solo 401k and it was cheaper when it was explained fully.

You might also try Fidelity for a small business plan. Or, if you need a third party administrator instead, try PenServe.

[thefinancebuff]

Quote:

Originally Posted by simple girl Can you explain what you mean here? I do not understand why/when the employer must or must not offer a match with the 401K.

SIMPLE IRA requires an employer contribution to all eligible employees: either 3% match or 2% straight regardless whether the employee participates. No choice there. 401k does not *require* a match if the participation level from employees is high. If the employees don't participate enough, the owner will have to offer a "safe harbor" match or unilateral contribution in order to contribute him/herself.

[jIMOh]

Quote:

Originally Posted by simple girl Hello all! We have a good friend who has his own business (health care practice) and is interested in getting his retirement plan going. He would like to learn about his options to make an educated decision instead of just giving the reigns completely to his accountant. I offered to post here to pick your minds for information. I have no background with small business retirement planning (I have plenty with our own personal retirement planning), so he and I will be facing a steep learning curve on this topic...so please be patient and kind with your responses, especially if I ask a very obvious question! He bought this practice I believe 3 or 4 years ago. His practice is thriving and growing. He is in his late 30's and does not have any personal retirement funds yet. He is married with 3 children. He has 7 employees. I've been reading about small business retirement plans, but honestly, my head is kind of swimming with trying to figure out what type of plan would be most advantageous for him to set up. We looked over what is offered at Vanguard, and we also looked at this tool (IRS Retirement Plans Navigator), but the decision of what type of plan to choose is still clear as mud to me. I looked at this table (IRS Retirement Plans Navigator) and here are my questions so far: 1) Payroll deduction IRA - only allows $5000 in contributions. This doesn't seem like nearly enough $ to fund anyone's retirement over the years. 2) SEP - this allows you to put away a huge chunk of change (up to $50K or 25% of the participant's income, whichever is less). It seems like it would be a great option, especially since it is not required every year, so it offers flexibility if the business is not doing as well one year. However, I read that if the self-employed person does have employees, all employees must receive the same benefits under a SEP plan. So, if he puts away 25% into an IRA for himself, he then has to do this for all of his employees, right? Isn't that awfully expensive and counterproductive? Yes, this I'm sure is stupid question #1, and you all will make the answer clear to me! 3) simple IRA - requires the employer to make contributions every year (albeit a much smaller percentage than the SEP), but it does lock you in to doing this, so not sure about starting out with this...? Also, can only put away $11,500 which again doesn't seem like a way to really sock away some coin and reduce taxable income significantly. Comments? OK, so I stopped looking further at the options listed on that IRS site, since Vanguard didn't go into them and this was already enough information to take in. Should we consider one of the other options as well? (I didn't look at the Individual 401K option listed on Vanguard b/c he has employees.)

The question I would start with is asking him "how much does he think he will contribute to this plan"?

I would then follow up with questions to him like "do you want to contribute for all your employees, or just yourself"? "Do you see yourself hiring more employees?", and "What do you want to happen if you have a bad year (lower revenues)?"

[jIMOh]

Quote:

Originally Posted by simple girl I really appreciate the input thus far. It seems like many are suggesting a standard 401K would be better for him to set up, despite it costing more to create and manage. A fundamental question I have is, why would any employer offer the SEP if he has to totally fund the employee's accounts? It seems to offer no advantages for an employer who has more than just himself or his spouse employed. Am I missing something here?

The basic trade off is if you pay higher fees, you get a bigger benefit for owner and employee. It comes down to who will use plan, how much they will use it, and the perceived benefit.

[Chicken-carbonara]

I have been using an outfit called PAI for many years to administer my companies 401k and have been happy with their fees and investment choices which is a mix 15 or so low cost ETFs. The monthly fee is roughly $70 as an employer and employees pay .25 percent annually in fees. This is a low cost provider as I have done a lot of shopping in this area. You can visit their site here: https://www.pai.com/

[MichaelB]

Quote:

Originally Posted by Chicken-carbonara I have been using an outfit called PAI for many years to administer my companies 401k and have been happy with their fees and investment choices which is a mix 15 or so low cost ETFs. The monthly fee is roughly $70 as an employer and employees pay .25 percent annually in fees. This is a low cost provider as I have done a lot of shopping in this area. You can visit their site here: https://www.pai.com/

Hi Chicken, welcome to the forum. Why not stop by and introduce yourself here

[MichaelB]

Hello Hiretus. Welcome to the forum. What brings you here?