What are the types of pension plans companies may offer employees? What are the advantages and disadvantages of each? It would be helpful to know before beginning a pension plan for your employees, if you have not already done so.

401 (k)

A 401(k) is a retirement plan that allows employees to contribute funds to a retirement account. The employer may match some or all of the funds contributed by the employee. The money is taken from pre-tax salary money and grows tax-free until withdrawn at retirement.

The advantages of a 401 (k) include: that such a retirement plan reduces the amount of tax taken out of each check; all money contributed and any growth in the account remains tax free until withdrawn; the company matching money is like extra salary for the employee; and unlike a pension, the money can be moved to a different 401 (k) plan.

The disadvantages for an employee include that it is expensive and difficult to access a 401 (k) account before age 59, and the money a company contributes does not become his property until he has worked for the company for a few years. A disadvantage for the company administering it is it can give an employee a false sense of security if the plan does not provide all retirement needs. Even if the employee did not properly plan for retirement himself, he might blame his lack of funds on his employer.

403 (b)

A 403 (b) retirement plan allows an employee to make annual contributions just like with a 401 (k). Also like with a 401 (k), the money grows tax-free until retirement and contributions are made with pre-tax wages. The plans are for tax exempt organizations such as schools, churches, hospitals, museums, and other public agencies.

An advantage of the plans is money comes out of an employee’s check automatically. Those involved choose how their money is invested. Participants may be in a lower tax bracket when they retire and use their money.

Disadvantages of a 403 (b) include investments being limited to fixed income investments, withdrawals are taxable immediately, there is a penalty for early withdrawal, and the fact investments have their own fees.

SEP Plans

SEP plans are the easiest for an employer to establish and maintain, so the simplicity is a major advantage for any company wanting to provide for the retirement of its employees. The plans are for any size business. An employer determines how much to contribute, up to 25 percent, of what an employee earns.

Employers may skip years under the plan, which provides another advantage in lean years. Employees do not contribute to the plan. The plans are tax deductible, and that is another reason some companies choose them. The documents necessary for the pensions are not complicated and are easy to administer. The company involved in the plan does not have to report to the government. Other advantages for business include low start up costs, and portability of benefits.

There are disadvantages for employers. One of the biggest is a requirement that part-time and seasonal employees, those who do not do as much to contribute to a company’s success be included.

Profit Sharing

Profit sharing involves a company providing monetary benefits which a business gives to an employee, apart from any salary or bonus, in the form of cash, stocks, and bonds. The money can be given at retirement, and how much will be given depends on the profitability of the company.

The advantages of profit sharing is that it unites companies and employees in the goal of making a company profitable, the motivation for an employee is high, which benefits the company, the fact the employee will identify with the company, and the company will be providing a good income for an employee or a former employee who has retired.

The disadvantages include that an employee may not focus on quality, but only on profitability, and the fact that employees’ salaries could go up if a company is profitable, even if they are not doing a good job.

Defined Benefit

A Defined Benefit pension plan is a plan in which an employer promises a specific monthly benefit when the employee retires. The amount to be given is determined by a formula.

One advantage is an employee does not have to contribute.

Disadvantages include the fact that such plans often do not keep pace with inflation, and the retiree has no say in how the money is invested.

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Category: Finances
Keywords: pensions, finance, retirement, plans