Does Your Company's Qualified Plan Match The Life Stage It's In?

From Start-ups to Maturity, There's a Retirement Plan for Every Phase

COLUMBIA, MD (Wednesday, August 11, 2004) - Small business owners may be so concerned about socking enough money away for their retirement that they overlook whether they're doing it in tune with their business, according to Fiducial, an international provider of professional business services for small businesses and individuals.

Indeed, finding the right qualified plan to match the life stage of a business is an important decision that can affect a company for many years to come, says Doug Adams, a Certified Financial Planner with Fiducial.

"Different plans are needed for different phases in a business owner's life," says the Annandale, VA-based Adams. "Each year becomes one less year that you can take advantage of, and failure to act is an opportunity lost. And small business people are all about opportunity."

Yet despite their prevalence for opportunities, the Small Business Administration reports that fewer than 15% of owners with 100 employees or less offer qualified plans. Experts say that the potential shortage of retirement funds is dramatic: the average American will spend 18 years in retirement-but with retirement capital of only $100,000 lasting just 10 to 13 years.

What can be done? Advises Adams, "the best way for a small business owner to avoid these retirement pitfalls is to think in terms of the life cycle of their business; basically whether they're a start-up, in a growth mode or in the maturity stage."

1. Start-up. These are characterized by the owner's personality and passion driving the company, and they generally, have few, if any employees. The owner typically has limited cash flow and is cost-conscious. Here, the owner wants to get a basic retirement plan at a low cost, and does not want to spend a lot on administration and compliance, such as filing the plan's forms.

Key choice: A Simplified Employee Pension Plan (SEP) provides owners with a simplified method to make contributions toward their employees' retirement and, if self-employed, their own retirement. Contributions of up to 25% of an employee's compensation are made directly to an Individual Retirement Arrangement (IRA) set up for each employee at a bank, brokerage or other financial institution, which saves the owner time and money in administering the plan.

2. Growth. As the company grows and becomes financially stable, the owner and key employees begin expecting rewards for their past efforts. Along with the profits, however, comes the taxman, and the owner is faced with keeping both the IRS and his main players happy. But since qualified plans force owners to not discriminate among employees, they cannot reward key employees differently than poor-performing ones. Cost then becomes an issue, as you begin administering a plan for all employees.

Luckily, says Adams, a retirement plan "fits the bill because it focuses as much of an owner's money back into their own net worth and they get the tax deductions for it."

Key choices: A SIMPLE IRA or profit sharing plan. A SIMPLE IRA is similar to a SEP in that the contributions are made to an IRA owned by each employee at his election. The difference is that a large portion of the contribution is made by the employee out of his salary, up to $9,000 in 2004 and $10,000 thereafter. The owner would then match the employee's contribution up to 3% of salary and the employee won't have to pay income tax on amounts contributed to the SIMPLE IRA. By allowing the employee to decide how much in salary to contribute, these plans help attract and retain them. They also allow a tax deduction to the company for the match and save the company money because employees share in funding their retirement.

Choice number two is a profit sharing plan, which allows deductible contributions of up to 25% of compensation or $41,000 (whichever is less) per employee per year. While these plans are more complicated and expensive to maintain, they provide more flexibility than the SIMPLE IRA. A profit sharing plan permits vesting schedules to promote employee loyalty by providing that the employee's benefits vest incrementally over the first six years of employment. Employees that leave before becoming fully vested forfeit a portion of their account.

3. Maturity. Eventually a company may reach the maturity stage, with sustained revenues and profits and a stable number of employees. This tends to occur later in the owner's career when retirement is dawning. If a retirement plan has not been in place to date, the older owner would need to make up for lost ground by maximizing contributions. Employees, many who are earning higher salaries and have been with the company for some time, would also be better off with a plan that maximized contributions as well.

Key choices: A 401(k) plan or a defined benefit plan. Most contributions to a plan with a 401(k) feature are made out of the employee's salary. An employee can defer more salary into a 401(k) than a SIMPLE IRA: $13,000 in 2004. In a 401(k), the employee elects how much he wants to contribute and contributions are made pre-tax. A defined benefit plan, on the other hand, is funded to provide a certain level of income for the life of the employee at retirement. "Defined benefit plans are attractive to the owner nearing retirement age," Adams says, "because this allows them to make higher contributions."

Both the 401(k) and defined benefit plans are more expensive to maintain but in a mature company, where cash flow problems are not a constant crisis, more costly plans are possible. The tax savings of the larger contributions and the cost savings of employee elective contributions make up for the higher administration costs.

There's a lot for entrepreneurs to consider when looking at qualified retirement plans and even within the aforementioned stages, each plan depends on the company's circumstances. That's why it's important to schedule a mid-year review now during Fiducial's "REV IT UP" campaign running through September.

About Fiducial
Established in Europe in 1970, Fiducial is privately held with revenues exceeding $600 million, Fiducial has over 6,500 employees worldwide serving 185,000 clients. U.S. operations are headquartered in New York City and rely on its Technical and Administrative Support Center (TASC) in Columbia, MD, for support.

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