10 Types of Retirement Plans Offered By Employers

Employers offer a variety of retirement plans to their employees, each with distinct features, benefits, and regulatory requirements. These plans generally fall into two broad categories: defined benefit plans and defined contribution plans. Understanding these options is crucial for both employers and employees to make informed decisions about retirement savings.

Defined Benefit Plans

Defined benefit plans promise a specified monthly benefit at retirement, often based on a combination of salary history and years of service. The employer bears the investment risk and is responsible for ensuring there are sufficient funds to pay future benefits.

Traditional Pension Plans

These are the most common type of defined benefit plan. They provide a fixed benefit upon retirement, calculated using a formula involving the employee's salary, years of service, and age. These plans are becoming less common due to their high cost and complexity in managing funding requirements.

Cash Balance Plans

A type of defined benefit plan that acts similarly to a defined contribution plan. Each employee has an individual account that grows annually with employer contributions and a specified interest credit. This hybrid nature makes cash balance plans appealing as they offer predictable benefits without the complex management of traditional pensions.

Defined Contribution Plans

Defined contribution plans, by contrast, specify the amount of money an employer and/or employee contributes to the employee’s account. The final benefit depends on the account’s investment performance. The employee bears the investment risk in these plans.

401(k) Plans

These plans are the most common type of employer retirement plan in the United States. Employees can contribute a portion of their salary, pre-tax, into individual accounts, often with employer matching contributions up to a certain percentage. There are annual contribution limits set by the IRS. Options include Roth 401(k) plans, where contributions are made with after-tax dollars but withdrawals are tax-free.

Pooled Employer Plans (PEPs) 

A Pooled Employer Plan (PEP) is a type of employer retirement plan that lets multiple unrelated employers join a single, professionally managed 401(k) plan. The plan is overseen by a Pooled Plan Provider (PPP), a third-party entity that handles administrative tasks, fiduciary duties, and compliance with regulatory requirements, reducing the burden and potential liability for individual employers. This collective approach allows small and mid-sized businesses to offer competitive retirement plans with lower fees and better investment options, improving retirement savings opportunities for employees.

403(b) Plans

Similar to 401(k) plans but designed for employees of public schools and certain non-profit organizations. This type of employer retirement plans allows pre-tax salary deferrals, with some employers also providing matching contributions. They may also include Roth options for after-tax contributions.

457 Plans

Typically available to state and local government employees and some non-profit organizations. This type of employer retirement plan allows employees to defer compensation on a pre-tax basis, reducing taxable income in the year of contribution. Like 401(k) and 403(b) plans, they have specific contribution limits.

SIMPLE IRA Plans

Savings Incentive Match Plan for Employees (SIMPLE) IRAs are designed for small businesses with 100 or fewer employees. These plans are easy to set up and manage, with both employee and employer contributions. Employers are required to either match employee contributions up to 3% of their salary or make a non-elective contribution of 2% of each eligible employee's salary.

SEP IRA Plans

Simplified Employee Pension (SEP) IRAs are designed for small businesses and self-employed individuals. Employers make contributions to individual retirement accounts set up for each employee. Contributions are tax-deductible for the employer, and employees are not taxed until distributions begin.

Other Types of Employer Retirement Plans

Employers may also offer additional retirement savings vehicles to complement primary plans or to provide more flexibility.

Profit-Sharing Plans

Employers contribute a portion of their profits to employee retirement accounts. The contributions are typically discretionary, allowing flexibility based on the company's profitability. Employees benefit from the company's success, but contributions are not guaranteed.

Employee Stock Ownership Plans (ESOPs)

ESOPs give employees ownership interest in the company through stock allocation. These plans can serve as both a retirement plan and a means to incentivize employees, aligning their interests with company performance. ESOPs can provide significant tax benefits to the employer.

Non-Qualified Deferred Compensation Plans

These plans allow executives and key employees to defer a portion of their compensation until a later date, often retirement. Unlike qualified plans, there are no contribution limits, but they lack the same level of regulatory protections and tax advantages.

Employer Considerations for Selecting a Retirement Plan

When choosing or offering retirement plans, several factors must be considered:

Fiduciary Responsibility: As a plan sponsor, employers have a number of fiduciary responsibilities to carry out in the best interests of their employees, including plan administration and investment selection and monitoring.

• Regulatory Compliance: Employers must adhere to strict regulatory guidelines set by the IRS and the Department of Labor. Compliance involves regular reporting, nondiscrimination testing, and ensuring proper plan funding.
• Cost and Administration: The cost of setting up and maintaining retirement plans can vary widely. Fortunately, starting up a plan, such as a 401(k), is more affordable for small businesses than ever, thanks to new tax credits introduced by the SECURE 2.0 Act.

• Employee Needs and Preferences: Employers should consider the demographics and preferences of their workforce when choosing the type of retirement plan. Additional decisions to consider include: whether or not to offer automatic features (enrollment and escalation), including a qualified default investment option; what to offer in terms of an employer match; how to support employee engagement and education on an ongoing basis; hiring a plan advisor, recordkeeper and other service providers; and how to determine the success of your plan.

• Tax Implications: Both employers and employees benefit from various tax advantages through retirement plans. Employers can deduct contributions, while

employees enjoy tax-deferred growth on their retirement savings.

A comprehensive understanding of the different types of employer retirement plans available enables organizations to offer valuable benefits that attract and retain talent while helping employees secure their financial future. Each plan type has unique features that cater to different needs, making it essential to evaluate and choose the most appropriate options for a given organization and its workforce.