Common Pension Plans for Small Business Owners
You have several options when it comes to selecting a retirement plan that fits your needs. Below is a brief overview of the most common types of retirement plans.
Traditional Defined Benefit (DB) Plan: This type of plan is a traditional pension plan that guarantees a specific retirement benefit based on your salary and years of service. The employer is responsible for funding the plan and assumes the investment risk. These plans can be complex and expensive to administer, but they offer the highest level of retirement income security.
Cash Balance (DB) Plan: A cash balance plan is a type of defined benefit plan that provides a fixed benefit at retirement, but is structured to look more like a defined contribution plan. The employer contributes to an employee’s “account,” which earns interest over time. At retirement, the employee can choose to take the account balance as a lump sum or an annuity. This plan is more portable than traditional DB plans and can be beneficial for small businesses that want to offer a retirement plan with higher contribution limits than traditional defined contribution plans.
Target Benefit (DC) Plan: A target benefit plan is a type of defined contribution plan that sets a target benefit for employees at retirement, based on factors such as age and salary. Employers are responsible for making contributions to the plan each year, and employees can choose how to invest their contributions. The retirement benefit is not guaranteed, but contributions are made each year to help achieve the target benefit.
Money Purchase (DC) Plan: A money purchase plan is a type of defined contribution plan where the employer makes fixed contributions to the employee’s account each year, regardless of the company’s profitability. The employee is responsible for choosing how to invest the contributions, and the retirement benefit is based on the value of the account at retirement. These plans are simple to administer and can be beneficial for businesses that want to make consistent contributions to their employees’ retirement savings.
When selecting a retirement plan, it is important to consider your business goals, budget, and employee needs. Each plan has its own advantages and disadvantages, so it is important to work with a financial advisor or retirement plan specialist to determine the best option for your business.
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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.