Employer-sponsored retirement plans aren’t just for big corporations. Even farmers with only a few employees might find there are benefits and advantages to offering a retirement plan.
What are the advantages to having an employer-sponsored retirement plan?
There are many options, but the most popular tend to be a Simplified Employer Pension (SEP) or SEP IRA, a SIMPLE IRA, and a 401K plan. An employer-sponsored retirement plan acts as a great tool in many ways:
- You can recruit high quality employees by offering them the ability to save into a retirement plan, often incentivizing them with an employer match.
- Employer contributions into employee accounts are tax deductible.
- Employee accounts grow tax-free.
- Tax credits for starting a plan may be available.
- Plans are flexible to adapt to your growing business.
Any money an employee earns that they contribute into a traditional 401K plan is money they will not pay income tax on now. They will pay income tax on it later when they withdraw it in retirement … but they are retired. The point is, when they are retired and not working a regular job, their income tax bracket will likely decrease significantly. Therefore, by deferring income into a traditional 401K and then withdrawing in retirement, an individual has much higher chances of paying less in income taxes.
When looking at different plans, what should a farmer be looking for?
As a business owner, the first thing I would look at is cost and complexity. SEP IRA and SIMPLE IRA plans are simple, cheap, and can accommodate up to 100 employees. They are not as flexible as a 401K, but they allow for many of the benefits discussed here. As a business grows near or above 100 employees, a 401K may be the more appropriate choice, and it allows for much more flexibility and ability to incentivize employees with options such as profit sharing, employer matching, automatic enrollment for employees, and Roth options.
A farmer should also consider what assistance is available from the servicing company or provider. Can an employee call them for help in signing up or discuss investment options? Employee education is becoming a much more sought after offering in the realm of retirement plans. Most people are good at their jobs, not navigating the complexity of retirement investing (hence the need for plan advisors) and will have questions such as how much should I defer out of my paycheck? Which funds should I invest in? How do I sign up and make adjustments? All of these questions should be able to be handled by the service provider the farmer selects.
What are some common mistakes in employer-sponsored retirement plans?
I would say the most common mistake is simply not using an employer-sponsored retirement plan. A simple phone call to any number of providers can instantly give a quote of cost and timeline to institute a plan. It takes a little time on the front end, but being able to reap tax benefits on the business side and set employees up for success in retirement are just a few of the many benefits of these types of plans.
When should a farmer start thinking about setting one or more of these up?
I would start with an informal poll of your employees. Is this something they would be interested in? Even if the majority say no, instituting a small, low-cost plan like a SEP IRA or SIMPLE IRA would allow for the business to enjoy some tax benefits and at least provide the option for the employees to utilize. I have often seen over time that it only takes one or two employees to begin utilizing an employer-sponsored plan, and many more begin to sign up as the advantages are realized and the word begins to spread.
Anything else farmers need to know?
Employer-sponsored plans can be complicated and utilizing a trusted financial advisor is a good way to navigate the deep pool of options. The primary components to keep in mind are cost, simplicity, and the ability to use the provider to help take care of the day-to-day tasks so that the farmer doesn’t have to.
Jordan Thayer is a financial advisor with the Global Wealth Management Division of Morgan Stanley in Seattle, Wash. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be appropriate for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.