Types of Retirement Plans for Your Employees

Employer-sponsored retirement plan options

In order to select the right plan for your employees, and for your organization as a whole, it’s important to know about various types of employer-sponsored and non-employer-sponsored plans, and how each of these plans differ. Employers have a variety of retirement plan offerings across several categories, including defined benefit plans, defined contribution plans, traditional retirement plans, and non-traditional retirement plans. Each of these plans are designed to meet unique savings goals, company sizes, and monthly budgets.

Although employers below a certain size and in certain states are not required to offer their employees a retirement plan option, many employers choose to offer these plans as an employee recruiting and retention tool. Employer-sponsored plans can be offered to employees at little to no cost to the employee while offering important tax incentives to employers, making them an attractive addition to any employee benefits program. To make plans even more attractive to employees, employers may offer matching contributions, though this is not required. Employer-sponsored plans can include 401(k) plans, SIMPLE IRAs, SEP plans, profit-sharing plans, employee stock ownership plans, 457 plans, cash-balance plans, and non-qualified deferred compensation plans.

401(k) plans

401(k) plans are one of the most popular employer-sponsored plan types because of their low cost, ease of setup, and overall flexibility. Employers that offer 401(k)s to their employees may qualify for tax incentives, and employers have some flexibility in setting matching options for their employees.

401(k) plans are a defined-contribution plan, where employees contribute a defined amount each pay period. The employer handles the administrative work of deducting the contributions, adding them to the employee's designated 401(k) account, and contributing any match or profit sharing contributions as outlined in the plan document. .

Pooled Employer Plans

A Pooled Employer Plan is a multiple-employer plan designed to take many administrative burdens off employers' hands. The Pooled Employer Plan (PEP) allows employers of any size to pool assets into a 401(k) plan administered by a professional Pooled Plan Provider (P3). There are many benefits of a PEP, it’s ideal for businesses who want an easy-to-manage, turnkey 401(k) plan with less cost, simplified administration, and reduced fiduciary risk.

SIMPLE IRA plans

Small businesses with 100 or fewer employees may opt to provide employees with a SIMPLE IRA plan, also known as a Savings Incentive Match Plan for Employees individual retirement account. Like a 401(k), both employees and employers can contribute to the retirement plan. Employees contribute on pre-tax basis, and employers are eligible for certain tax benefits.

Unlike a 401(k), employers are required to contribute either a match of up to 3% or a 2% nonelective contribution for each eligible employee. However, employers do not have to meet the filing requirements of a traditional 401(k) plan. Another difference from 401(k) plans is that employees cannot opt out of participating in a SIMPLE IRA if they are eligible; they must receive the non-elective company contributions if eligible.

SEP plans

A Simplified Employee Pension (SEP) plan is similar to a SIMPLE IRA but is catered more toward self-employed or small business owners. The most significant difference between a SIMPLE IRA and a SEP is that employees cannot add elective contributions to a SEP plan — only employer contributions are allowed. When using a SEP plan, the employer also has greater flexibility in when and how much to contribute.

Profit-sharing plans (PSPs)

Profit-sharing plans (PSPs) are a special type of retirement account that allows employers to reward qualified employees for positive company performance. When a company offers PSPs, each eligible employee will receive an employer contribution on a quarterly or annual basis. Like SEP plans, these retirement accounts are only designated for employer contributions — employees cannot make additional elective contributions.

Profit-sharing plans can be offered by businesses of any size, and companies can elect to offer a profit-sharing plan even if other retirement account plans are offered to employees. While employers have a lot of flexibility in when and how to make contributions to PSPs, PSP allocations must not discriminate in favor of highly compensated employees.

Employee stock ownership plans (ESOPs)

Instead of cash contributions, employee stock ownership plans (ESOPs) provide a vehicle for companies to reward employees with stock ownership in the company. This form of retirement account can benefit employers by providing an employment incentive that offers tax benefits for the company. The stock ownership also keeps employees focused on building profitability within the company, since they will directly benefit when the company's stock rises.

457 plans

457 plans are very similar to 401(k) plans, but these retirement accounts are typically only offered through governmental employers and not for profit organizations. Additionally, 401(k) plans are qualified retirement plans, meaning they must meet all the reporting guidelines and restrictions of ERISA. On the other hand, 457 plans are typically non-qualified plans and not held to the same standards.

403(b) plans

403(b) plans are also very similar to 401(k) plans, but these retirement plans are only for certain employees of public schools and tax-exempt organizations. Similar to a 401(k) plan, 403(b) plans allow employees to defer some of their salary to individual accounts.

Cash-balance plans

Older employees with high savings goals may appreciate the high contribution limits of a cash-balance pension plan. With cash-balance plans, the employer contributes a set percentage of an employee's salary annually to the account. Employees older than age 60 can save more than $200,000 annually, as compared to a maximum combined contribution limit (including employer contributions) of $76,500 in 2024 for a 401(k). Cash-balance plans provide a vehicle for older investors to dramatically increase their retirement nest egg on a pre-tax basis.

Non-qualified deferred compensation plans (NQDCs)

Another employer-sponsored retirement vehicle is the non-qualified deferred compensation (NQDC) plan. This plan has some of the most stringent requirements and do not typically involve any addition to an employee's compensation. Instead, the qualifying employee uses the account to defer part of their expected annual compensation to a future tax year. With NQDC plans, the employee must make this optional election before the tax year in which the deferred income will be earned. Once these plan elections are made, they cannot be revoked.

Types of retirement plans not sponsored by employers

While employees may be most familiar with retirement plans sponsored by their employers, there are also a number of retirement plan options that are not sponsored by employers. These plans are particularly useful for individuals who would like to save for retirement but are self-employed, between jobs, or who have reached the contribution limits in employer-sponsored plans and would like to continue investing for retirement.

Non-employer-sponsored plans can be set up through any properly licensed investment broker, so individuals can "shop around" and find plan options that best meet their needs. With employer-sponsored plans, employees are typically limited to the one or two options offered by their employer and have little say in which plans are offered or how the funds are invested. With non-employer-sponsored plans, individuals can maintain much more control over their retirement funds.

Traditional individual retirement accounts (IRAs)

Traditional IRAs allow individual investors to save for retirement on a pre-tax basis, up to certain contribution limits set by the IRS. Like 401(k) plans, there are some reporting requirements designed to provide transparency to individual investors and ensure that plan funds are being managed in a fiscally responsible way, but the reporting burden is on the shoulders of the financial institutions that manage and offer the IRA plans, not the individual account holders.

If IRA funds are withdrawn before the account owner reaches age 59 ½, they will likely incur penalties, and all funds are taxed when they are withdrawn from the account. This allows investors to save funds for retirement, when they are more likely to be in a lower tax bracket.

Roth IRAs

Roth IRAs are similar to traditional IRAs, but all plan contributions are made on an after-tax basis. Because plan contributions are made with after-tax money, future withdrawals made at retirement age are made on a tax-free basis. Roth IRA contributions are still subject to certain annual contribution limits, and plans are set up through a traditional brokerage or financial advisor.

Payroll deduction IRAs

For investors who like the convenience and accountability of payroll deductions to fund savings strategies, some traditional and Roth IRAs can be set up to be funded on a pre-tax (for traditional IRAs) or post-tax (for Roth IRAs) basis via payroll deduction. The benefits and limitations of these accounts mirror their non-payroll-deduction counterparts, but with the automated contributions deducted directly from a paycheck.

Guaranteed income annuities

Guaranteed income annuities, sometimes simply referred to as income annuities, are a specific retirement savings tool that converts retirement savings into a regular monthly stream of income. Income annuities come in two forms — single premium immediate annuities (SPIAs) or deferred income annuities (DIAs). In both cases, the income annuity accounts are using funds already saved for retirement to "purchase" a regular, guaranteed stream of income, regardless of how the investment markets perform.

Cash-value life insurance plan

Although cash-value life insurance plans are not designated solely as a retirement plan, they can certainly be used for this purpose. With a cash-value life insurance plan, a life insurance policy is purchased on the life of the investor, and the policy also includes a cash-value portion that accrues tax-deferred interest. This can be an attractive retirement savings option, since money grows on a tax-deferred basis and the cash value can typically be accessed for certain life events (such as retirement) while the investor is still alive.

Conclusion

Whether you are looking for retirement savings options for yourself or your employees, there are a number of different plans available to meet a variety of needs. The best plan options will depend on your age, savings goals, the size of your organization, and varying tax needs. The best retirement strategy will involve cooperation with a retirement specialist who can understand your organizations needs and work with you to achieve your goals