As a firm owner or partner, you are invested in the success and overall financial health of your employees just as much as your own. Regardless of the size of your practice, offering a retirement plan has many benefits including attracting and retaining top talent. In this article you will find useful information about different types of retirement plans available in the market today and criteria you should consider when selecting the right plan for your firm.
What are the options?
There are several different options when it comes to selecting a retirement plan. The right option can depend on the size of your firm and your preference for contribution eligibility, administrative responsibility, contribution limits, fiduciary exposure, access to the savings, and costs to maintain the plan. Some of the more common options include SEP-IRA, SIMPLE IRA, and 401(k).
SEP-IRAs are for self-employed individuals or small business owners, including those with employees. They are easy to set up and maintain and typically have no or low initial setup or annual maintenance fees. Only employers can contribute to this plan, and while employees can withdraw at any time, a 10% penalty may apply if the withdrawal is made before age 59½. Employer contribution is limited annually to the lesser of 25% of compensation or Section 415 limit of $54,000 in 2017. The employer must contribute the same percentage of compensation for all employees, including themselves.
SIMPLE IRAs are ideally suited as start-up retirement plans for small employers not currently sponsoring a retirement plan. Employer contributions are required and employee deferrals are optional. Participants can withdraw at any time, but a 10% penalty may apply if they are under age 59½. This penalty can increase to 25% if the withdrawal is made within the first two year of the plan being established. This type of plan is typically low cost to both the employer and employees. Employers can either make dollar-for-dollar matching contributions not to exceed 3% of participant’s compensation, or a 2% non-elective contribution to all eligible employees, regardless of whether they make deferral contributions. Employee contributions are limited to a maximum of $12,500 in 2017 (catch-up contribution of up to $3,000).
401(k) plans are for companies of all sizes. They allow generous contribution limits and the most flexibility in plan construction. Both employers and employees contribute. Loans may be available and hardship withdrawals may be available, but a 10% penalty may apply if you are under age 59½. 401(k) plans are typically slightly more expensive than a SEP-IRA or SIMPLE IRA, but cost can vary from provider to provider. The 2017 limit of $54,000 applies and the maximum employee contribution allowed is $18,000 in 2017 (catch-up contribution of up to $6,000).
What are the costs?
Before selecting a plan for your firm, you should have a thorough understanding of its cost, which can include costs to your firm as well as costs to your participating employees. There are several types of fees a retirement
plan provider can use to collect revenue. All of these fees can quickly add up to thousands of dollars, which can erode the profits of your law firm, and negatively impact an employee’s retirement savings. A good place to start is by reviewing your provider’s 408(b)(2) disclosure, which requires annual disclosure by retirement plan service providers to plan sponsors and fiduciaries of fees charged, services provided & information on other compensation received.
Selecting the right plan for your firm
There are several factors that come in to play as you are selecting the right retirement plan for your firm. Remember that all options are not equal and there will be tradeoffs.
In you are a solo practitioner, you may look to simplify administration of the plan and keep its cost low. In that case, a SEP-IRA might be a good option. But if you’re looking to maximize savings, consider a solo 401(k) instead.
If you have a small or growing firm, you may look to increase the richness of your plan’s benefits in order to attract and retain valuable employees. A Safe Harbor 401(k) or a generous employer-match structure can accomplish that.
Some firms may look to provide higher wage workers with more opportunities to save, while ensuring the plan still meets certain testing requirements. Using 401(k) plan designs such as cross-testing, which allows higher contribution rate to certain employees, may help achieve that. Another type of plan that is gaining popularity is cash balance plans. These plans can be used in addition to your 401(k) plan, and may significantly increase your ability to set aside tax advantaged savings.
No matter what your objective is, selecting the right plan for your firm can be complex. Many firms will rely on the guidance of professionals in the field. You may want to consider contacting the ABA Retirement Funds Program (“the Program”) or visiting its website at www.abaretirement.com for more information.
The Program was developed exclusively to meet the needs of law firms when it comes to sponsoring a retirement plan. Much as you are invested in the success and overall financial health of your employees, the Program in invested in the success of law professionals when it comes to achieving retirement security.
Press inquiries: Christine Hotwagner
Program Operations Director ABA Retirement Funds