Retirement Benefits and Pension Plans for Small Businesses

A recent study reported that 64 companies contribute $100 million while 3 (Ford, Exxon Mobil, and Delta Airlines) commit to paying $1B or more to highly defined employee retirement benefits plans.

However, these plans are not just suited to large companies. Although they used to be crucial to the American market, defined benefits and pensions plans have largely fallen out of favor. In the wake of the 2008 financial crisis, these plans took on negative connotations.

As a result, most people tend to associate these plans with employees in the public sector. To them, the plans are just another part of the unwieldy and wasteful strategies adopted by city and state governments.

Corporate pensions, on the other hand, are becoming obsolete. New employees at most companies no longer receive pension plans. The cause might be from the rising cost of doing business compounded by tough economic times, which has forced many private sector firms to remove defined benefits plans from their budgets.

The trend is so dire that one would be compelled to question why business owners don’t plan on retiring. Do they, perhaps, assume that they will sell their companies to get funds for their retirement when the time comes?

Even in the face of its diminished popularity, retirement benefits still make sense to a particular demographic: successful small business owners. For this entrepreneurial class, pension plans are the perfect retirement vehicle to enable them to retain their wealth, and better run their businesses.

However, financial advisers still opine that most high net worth individuals and entrepreneurs have any stable retirement or pension plan. In fact, a report from the Bureau of Labor Statistics shows that less than half the workforce at most companies with less than 50 employees has a pension or a 401(k).

That said, it is noteworthy that 58% of employees have access to a pensions plan while 49% actively participate in at least one. Looking at the numbers differently, 30+ million full-time and full-year workers in the private sector aged between 18 and 64 do have access to a retirement plan created by their employer.

Benefits of Retirement and Pension Plans

This trend is a flaw in the marketplace – one that can be efficiently resolved in ways that are mutually beneficial to both the employee and the employer. For small business owners earning annual incomes above $200,000, it would be wise to set up a pension plan with or without an already existing retirement investment strategy. The best, of course, include the IRA and the 401K.

Some of the benefits of retirement planning include:

a) High Contribution Limits

Like IRAs and 401K plans, contributions to self-funding pension plans are mostly tax deferred. However, they also come with more flexibility and higher contribution limits.

b) Reduced Rates of Staff Turnover

Adding a pension scheme to the benefits package offered to employees will enable a company to retain its current workforce while attracting top talent from outside.

c) Risk Mitigation

Creditors cannot seize assets invested in a pension plan. If a business is the target of a frivolous lawsuit, it will be able to protect itself against downside risk through the established retirement plan.

Even with the above benefits, some businesses fear the costs involved with setting up a definite pension plan for their owners and employees. This concern seems to arise from the fact that administration fees for pension plans are quite high, especially in comparison to retirement plans.

While this might be difficult to believe, it is entirely understandable. When one considers the fact that most small entrepreneurs are driven and laser focused on building and growing an enterprise, it becomes easy to understand why so many fail to dedicate some of this effort to their personal financial affairs. One of the issues that arise as a result is that most of them fail to create a comprehensive personal financial plan to maximize retirement savings.

So, how can this trend be overhauled? One effective strategy would be to contract the services of a plan actuary to calculate employee funding levels on an annual basis. These services, in and of themselves are costly. As such, companies that require a high degree of liquidity to keep their operations flowing might not view pension plans as the best option.

Overall, successful entrepreneurs and high net worth individuals should seriously consider creating these plans for themselves and their staff. This way, they will be better placed to protect themselves, their businesses, and their personal wealth while maximizing the tax advantages of their retirement savings. In this area, pension plans will address almost every objective most business owners have.


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