What is an employer-sponsored retirement plan? What kinds of retirement plans can my business choose from? Join Clayton & Wayne from Squire Wealth Advisors as they discuss your options as a business owner in Part 1 of our Business Owner series.
Clayton: For those who may be unfamiliar, what is an employer-sponsored retirement plan, and what different kinds are there?
Wayne: So unlike, say, an IRA or anything like that, that any individual can go and set up and then contribute to -- IRA or Roth IRA -- a company-sponsored plan is actually created by the company. So for example, Squire creates a 401(k) plan for our employees to participate in. It allows the employees then to contribute, and the company matches. So it's company-sponsored. They're the ones that put it together, just for the ease of having a retirement plan for their employees. There are a number of different types. The two main categories are defined contribution and defined benefit. A defined contribution plan is a type of plan where the employer contributes to a certain limit. A defined benefit plan is a plan where they're trying to get a certain amount into a balance to provide a benefit for someone's retirement years. So that's what that is.
Types of defined contribution plans include 401(k) plans and profit-sharing plans (sometimes those two are combined). There are other types we don't see as often with hospitals and educational facilities, things like that. We won't get into that today. On the defined benefit side there are your typical pension plans, that's a type of defined benfit plan, and then cash balance plans. That's typically what we see. There are a few others out there but that's typically where people go. Probably the backbone of all of those is 401(k) plans. Most companies, if they're setting up a retirement plan that's what they're looking for, is a 401(k) plan.
Clayton: Yeah, that's great. Probably with even our own clients, most of the time it's 401(k)s that we're dealing with. They seem to be the most flexible, they work the best with most situations.
Wayne: Yeah, they work really well. You can combine them with a profit-sharing plan, they're fairly inexpensive in their operation, and in the amount that the employer needs to contribute for the employees. They don't have the real high limits as far as the tax savings and the amount of contributions that can be made to, say, a cash balance plan, but for your typical employer with a number of employees, 401(k) plans work tremendously well.