Offering a retirement plan is a great benefit that allows employees to contribute to their future in a meaningful way. But this great benefit can turn into a nightmare for employers if it is not handled appropriately. Take a look at the three most common mistakes we see employers make when starting a retirement plan for their team.
Mistake #1: Not understanding your retirement plan offerings
When setting up a group retirement plan, you will fill out a bunch of paperwork, and it is easy to disregard all this paperwork as a mundane administrative task, but it is forming the framework of what you can and cannot do within your plan (this framework is called a Plan Document, which is reeeally important). You see, a retirement plan is subject to the Employee Retirement Income Security Act of 1974 (ERISA), which was passed to protect employee benefits from being mismanaged by those in charge of the plans. Because of this, there are a few items that you need to pay special attention to when forming your plan.
Types of contributions
When you create your retirement plan, you will elect the types of contribution sources that your employees will be able to select from. The three most common sources are traditional, Roth, and loans which are all discussed below.
A traditional contribution is the most common type of retirement funding, and it allows your employees to defer their compensation to their retirement years. The way this works is that an employee will elect to have some of their pay deducted from their paycheck and invested in their retirement account. In doing so, the employee does not pay income tax on the amount withheld until they receive the funds in retirement. This is an immediate tax benefit, however, any growth in the amount that was invested will also be taxed when the employee withdraws the funds. For example, if I contributed $100 to my retirement account today, I would not pay income tax on that $100 this year. Instead, I would pay income tax on that amount, plus however much my contribution increased to when I accessed these funds in retirement.
Another common type of retirement contribution is the Roth. A Roth contribution is an after-tax deduction that grows tax-free within an employee’s retirement account. Using the same $100 contribution as above, I would pay income tax on that contribution in the current year, however, when I accessed my retirement funds in the future, I would not have to pay any additional tax. This is very advantageous when you consider most of your funds available in retirement are the growth on the funds contributed and not the actual principal itself. Because of the tax benefits of a Roth account, we recommend always allowing employees to contribute to a Roth account when setting up a plan.
A third option that some employers will allow is taking out loans against a retirement plan. The specifics of how loans work are going to be dictated by the record keeper that is chosen, but it is common to see loans up to 50% of an employee’s balance. With a retirement loan, employees receive funds from their own account that must be paid back within specific terms of the loan. Allowing loans comes with an administrative burden that must be followed precisely in order to not violate the terms that are set forth in the plan, and for this reason, some employers choose not to allow employees to participate in loans at all.
Once you have decided on the types of funding your plan will allow, you will also get to choose the plan entry dates. Plan entry dates are the dates that employees are allowed to begin participating in the plan. You would think that employees can hop into the plan at any point, but that is only true if your plan specifically allows this. Other options are to allow plans to begin participating on the first of the month, first of the quarter, semi-annually, or whatever else you can dream up. One of the benefits of dictating a plan entry date is that you can administer the plan on a fixed schedule instead of having to be reactionary when an employee chooses to enter on their own timeline.
This is where some of the fun begins! One of the reasons you may have considered beginning a group retirement plan is so that you can contribute to your employee’s future, which is an awesome benefit! A few ways you can contribute to an employee’s retirement plan will be outlined in your group’s application form. The important part to consider is whatever you decide on, make sure EVERYONE on your team is aware of the rules! Like everything else we’re discussing in this article, your employer contributions must be followed consistently. Every. Single. Time. If you start to deviate from what your rules state, you will open yourself up for ERISA issues that can be costly and time-consuming.
Finally, when you set up your plan, pay special attention to the rules on who can participate. This is where you can specify any age requirements, hours requirements, special classes of employees, etc. Setting up your eligibility rules will allow you to create a plan that accomplishes your goals without overextending to people that you would like to not participate. The two most common rules that get set up are an age requirement, and a number of hours worked requirement. If you are trying to limit participation to people that are 21 years old and are closer to full-time status, adding in these requirements will prove to be a wise addition.
Mistake #2: Manually tracking the plan
By now, you probably realize that a retirement plan does come with a significant amount of administrative burden, but like most things, this burden can be managed electronically with a high level of automation. It is important to understand, however, the different elements of technology that need to be involved. On the simpler side, payroll will need to be included in the equation as that is where the employee’s funds will be deducted from. The timing of when those funds are deducted and for whom the deduction is for should be managed within your payroll system. You will also have a record keeper in place, which is where an employee chooses which funds they would like their contributions invested in. In some cases, the record keeper and payroll can be integrated, but in other instances, they cannot. In the instances where they cannot be integrated, it may be time to look into investing in technology that will allow this type of automation.
Because your retirement plan is governed by ERISA, any mistakes with properly funding an employee’s retirement plan must be disclosed to the government and to the employee, which no one wants to do. And since many of these mistakes are simple clerical errors in the tracking of eligibility, using technology to do this work for you is a must-have!
Mistake #3: Waiting to fund the plan
Whether it is unintentional or intentional, not funding an employee’s retirement plan within the designated timelines can turn into a nightmare for employers. The IRS has strict timelines for when funds must be deposited into a plan. These are based on the type of contribution and the type of plan. While watching cash flow is important, we recommend funding all contributions as part of your regular payroll process to avoid getting into issues. For example, if you have set up a 401(k) plan, you are required to deposit all employee deferrals within 15 business days after the end of the month in which the money is deducted.
This would mean that a paycheck deduction on January 1st must be deposited by February 15th, and a paycheck deduction on January 31st must be deposited by the same February 15th deadline. Instead, we recommend keeping things simple and contributing the January 1st deduction on January 1st and the January 31st deduction on January 31st. The benefit to this, other than avoiding compliance issues, is that you can close out all tasks related to those payrolls at the same time you are closing out the payrolls. No need to let those tasks linger into the future and run the risk of it getting forgotten! And like we mentioned earlier, with the automation that is available between a record keeper and payroll system, this process should be as simple as a few clicks of a mouse.
These are the areas you need to pay special attention to when rolling out a retirement plan. Don’t take it lightly. Retirement plans can be a huge benefit that employees find valuable. As a matter of fact, according to one SHRM survey, almost 90% of employees thought retirement benefits are either Important or very important to their overall job satisfaction! Can you think of many things that 90% of your employees would agree on? Me neither!
If you are considering offering this benefit (or if you already have a plan in place), take a minute to talk with your payroll and human resources team to see if they understand your plan. Ask them how they are tracking the rules of the plan and investigate the timeline for when your plan is funded. If you find some holes that need to be patched, give us a call and we can help simplify this awesome benefit for both you and your team!