Usually, employers offer retirement plans to their employees because the promise of a secure retirement represents an effective way to recruit and retain valuable employees (Garman & Forgue, 2009). Even though the Employer Retirement Income Security Act (ERISA) does not require companies to offer retirement plans, it does regulate those plans that are provided.
ERISA is an ACT that provides a guide for employers seeking to create retirement benefit plans to support their employees when they finally retire and leave the organization. The statute ensures that organizations implementing the planning are fully responsible for any eventualities. Similarly, participants are also entitled to some rights and, these must be made known to them. In addition, ERISA calls for proper plan reporting and disclosure to all affected participants.
This paper discusses three types of retirement plans that can be set up for the sake of employees. The three plans are Simplified Employee Pension (SEP), Savings Incentive Match Plan for Employees (SIMPLE), and Qualified plans. The paper also presents a communications plan that may be used to encourage all employees to participate in the retirement plan.
Retirement Benefits Plans
For most people, a retirement plan provides the largest single pool of cash they will ever receive, and choosing the right plan can be beneficial for both the employer and the employees. As stated earlier, an organization may choose to adopt either SEP, SIMPLE, or Qualified plan. The basic features of these three types of retirement plans are explained as follows.
Simplified Employee Pension (SEP) Plans
Simplified employee pension plans are geared toward employers who may be discouraged by the complexities of establishing a regular qualified plan. Under a SEP, the employer agrees to make contributions to an individual retirement account (IRA) for each eligible employee. To establish a SEP plan, three conditions must be met. First, the organization must clearly state how employees will benefit from the plan, and this will need to be communicated to all the affected employees in this organization.
Second, the organization will be expected to provide certain information about the plan to each employee. Third, the employer must establish a SEP-IRA for each employee over the age of 20 whose compensation is at least $500 and who has performed services for the employer during at least three out of the preceding five calendar years (Johnson, 2008).
The employer provides contributions to a SEP-IRA account set up for each individual employee. An organization is not required to make contributions every year, but in certain years the organization does make contributions; it must contribute amounts for each participant.
The organization will be expected to allocate contributions to employees based on agreement and without showing any form of discrimination. The organization’s SEP-IRA contributions for employees are deductible as employee benefits and end up reducing business profits (Johnson, 2008).
Savings Incentive Match Plan for Employees (SIMPLE) Plans
Under a SIMPLE plan, all the employees are free to allow the employer to make agreed deductions from their salaries for their own benefit in the future. This is, therefore, an amount that an employee never touches until it is time to do so.
The two types of SIMPLE plans are SIMPLE IRA and the SIMPLE 401(k) (Johnson, 2008). Apparently, 401(k) plans are a very popular type of employer sponsored defined contribution retirement plans. These plans, which are sometimes called cash or deferred arrangements (CODAs), allow employees to either defer a portion of their salary or receive it in cash. Benefits paid in cash are taxable to the employee as wages and deducted as wage expense by the employer.
Non cash benefits are not taxable to the employee but are deducted by the employer as employee benefits. As a general rule, extra amounts contributed to an employees’ 401(k) plan by the employer are not subject to income tax withholding and are exempt from unemployment taxes. Furthermore, employer’s contributions to employees’ 401(k) plans are not added to the maximum annual limit.
When compared to SEP and SIMPLE, the qualified plan is implemented under very strict rules. However, it is important to note that an organization enjoys some distinct benefits associated with the adoption of the qualified retirement benefit plan. Among other advantages, the qualified plan is somehow more flexible.
According to Johnson (2008), contributions to qualified plans are generally deductible by the employer in the year when they are paid, regardless of whether the employer uses the cash or accrual method. The two basic types of qualified retirement plans are defined benefit plans and defined contribution plans. A defined benefit plan promises participants specified benefits during the retirement years and continuing until the death of the participant and often until the death of the spouse of a participant.
The amounts that can be expected upon retirement are often dependent on the functions performed by the employee and the period of time the person worked for the company, as well as the level of compensation earned during those years. Typically, the benefits are indexed annually to take care of inflation. Under a defined contribution plan, the employer can make specific contributions on behalf of each employee covered under the plan.
Usually, the employer’s contribution is a small percentage of what the employees is expected to receive as benefits. Unlike contributions to defined benefit plans, the contributions made under the defined contribution plans are usually linked to each individual employees account. Thus, these accounts resemble individual retirement saving accounts. At retirement, employees are entitled to whatever balance has accumulated in their own accounts (Johnson, 2008).
Communicating the Plan to Employees
In designing the communication plan, it will be important to look at it from the employees’ point of view. The organization may use the following approach to communicate its plan. First, it will be important to understand the level of employee morale within the organization.
Although undertaking a research to understand employees’ attitudes may be time consuming, it is necessary for the organization to do so if anything good has to be realized from the communication plan. Incase employees are demoralized, it will be necessary to find out why and address any burning issues so as to create a healthy environment for communicating the plan.
Secondly, the organization should embark on finding out how employees feel about the current state of affairs in the organization. Employee perception questionnaires are generally very useful when it comes to gathering information on how employees really feel about the organization. Once these two things have been dealt with, the organization may proceed to communicate the plan to its employees.
To effectively communicate the plan, the organization should set aside a day and, if possible, arrange meetings with the employees at an appropriately set time. For effectiveness, it will be necessary to ensure that all employees are involved right from the initial stages.
The organization may appoint a team of individual within the organization to spearhead the whole communication process. Among the tools to be used to communicate the plan are email applications. Incase meetings are to be held, either overhead projectors or flip charts may be used in some cases. Another approach may involve the use of focused group discussions.
During such discussions, the facilitators must create an atmosphere that will encourage every employee to freely participate and communicate his or her ideas or feelings. In order to overcome resistance to participation, the organization will have to communicate its ideas as frequently as possible to all participants. In addition, it will be necessary to reward staff for involvement in the process.
As it has been discussed in this paper, it is obvious that all the retirement benefit plans hold a number of benefits to both the organization and its employees. It is therefore the responsibility of the organization to decide which plan to adopt. However, it is imperative to understand that communicating the plan to employees is equally critical to the success of any of these plans.
This means that the organization will need enough time to design a communication plan that will encourage all employees to get involved in the entire process. Without an effective communication plan, it does not matter how good a retirement benefits plan is. Any obstacles to the communication plan must be dealt with and efforts should be made to ensure that they do not derail the process of putting the plan into action.
Garman, E. T., & Forgue, R. (2009). Personal Finance. Mason, OH: Cengage Learning.
Johnson, L. M. (2008). Federal Tax Course. Chicago, LA: CCH.