What is the best type of retirement plan?
My company plans to start offering a retirement plan with a high degree of matching. The more I look into it, the more I realize there are a ton of options. Traditional 401k, Roth 401k, SEP IRA, SIMPLE IRA... What factors are key in making one plan a better choice than another?
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A traditional verses Roth should be on an individual employee choice. – Jeff O 14 years ago
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So, for any 401k plan we sign with, the employee would get either option as per their preference? Or are you saying that we should only sign with providers that offer both? – Jeffrey Blake 14 years ago
3 Answers
The laws and rules about retirement plan options - and thus the pros and cons - change constantly.
I gather because you're asking this question that you don't employ an HR professional who stays on top of this. So I would suggest retaining a benefits consultant. You want somebody you pay and who doesn't make their money by steering people toward particular securities, because they're more likely to give you unbiased advice.
A 401k generally has the most scalability. The IRA options are designed for individual or very low head count situations. Pensions are wholly unsuited to a labor market where workers change jobs 5+ times during their career. A 401k allows employees to stash away $17k per year pre-tax and as your cash flow situation changes, you can increase the benefit with a matching contribution and a profit-sharing component (over $50k). The 401k is also a fair and broadly applied benefits program that is prohibited by law from discriminating against lower wage employees to the benefit of higher wage employees.
Frank is right to highlight the hidden fees and bad incentives caused by some brokers in the 401k space. But with increased fee disclosure a new breed of investment advisors are changing that. It's possible to get a very cheap 401k plan for even small start ups with access to over 10,000 funds, including index funds and ETFs (even the entire Vanguard lineup).
The best retirement plan you could offer is a sort of Pention, Company Stock, Company Dividends, etc.
Say you have a developer that gets paid 75k per year, it think its rather irresponsible to offer a 401k that encourages him to invest in the stock market (the biggest ponzi scheme known to man), rather than invest in the company he works for.
Him investing in your own firm has a double effect where he can nurture his investment by making sure that he is at his best, builds high moral, and gives your employees a sense of ownership and responsibility. You could come up with a long term profit share / pention plan where employees get dividend paying stock.
I think its a way better way to go than the traditional 401k, where the broker is happy to make his $$$ but doesnt give a rats penis if your clients lose their retirement in a bad economy.
In my company we have an "When i eat, we all eat attitude" We dont have shares or pensions yet, but have very healthy yearly bonuses out of a pool of 15-25% of our yearly net income.
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-1: Enron and Worldcom did that. There are a lot of ex-Enron and ex-Worldcom employees eating cat food in their later years, and in the wake of those corporate collapses, the people responsible for the retirement plans there were found personally liable for the retirement fund losses. If you want to give out options or shares as incentives, or do profit-sharing, that's great, but someone's retirement shouldn't crash and burn because of one company's screw-up. – Bob Murphy 14 years ago
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A lot of investors lost money on ENron and Worldcom also, its not because the idea is bad, its because the companies were a scam. The truth is 95% of companies in the stock market trade way too high based on what they are actually worth. They are all Worldcomms waiting to happen. Why promote your employees investing in that?. I say do the profit share, and as for retirement, leave that up to your employees. The best retirement plan is a paid off house, and some positive cashflow either from rentals or other investments. Let your employees take responsibility for that. – Frank 14 years ago
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One thing about America's credit culture is that we are comfortable living month to month. Most rich arent, and that is why they are rich. You want to teach your employees (if you give an F about them) how to properly manage their money. How to pay off a mortgage in 15 or 10 instead of 30. How never to refinance and start over an amortization table. How to make solid decisions where thye are in control of their money. We do the bonuses and it works. With our main team, we make sure they know how to properly plan for their future. Leading by example. – Frank 14 years ago
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Pension funds are always going to be invested in the stock market. Unless you're working for a US State like New York, where the state constitution guarantees your pension with the full faith & credit of the state, I'd rather manage my own money. – Duffbeer703 14 years ago
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We dont have this yet, but why would it be hard to setup a private pension fund using the companies own profits to fund the pension? Wouldnt it be safe to say that if an employee was to earn lifetime compensation based on the companies future perforance (after retirement) that that too would be a good bet? I am a firm beleiver that private companies out perform public ones on a ratio of dollars made to dollars invested. – Frank 14 years ago
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This is totally ridiculous. Instead of a balanced wide investment you want the company to basically borrow the money to the startup he works for although most startups fail? Gross neglegt. – Net Tecture 13 years ago
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sounds really stupid until your stop and realize most publicly traded companies are part of a ponzi scheme. – Frank 12 years ago
