Retirement

As the owner of a small business, you may like to be able to offer your employees a retirement plan benefit, but cannot do so for several reasons. Cost is obviously a major concern, but the complexity involved in administering a defined contribution plan, such as a 401(k) plan, is another significant issue. However, the Savings Incentive Match Plan for Employees (SIMPLE) IRA is a lesser known retirement plan alternative that may allow you to help improve your employees’ retirement readiness. A SIMPLE IRA offers employers and employees several distinct benefits and are less costly and complex than other retirement plans. Here’s what you need to know about SIMPLE plans, how they operate, and what conditions an employer must meet in order to establish a SIMPLE IRA.

What It Is
It is a retirement savings plan targeted at employers with 100 or fewer employees who earn $5,000 or more in compensation. A SIMPLE IRA plan has less onerous reporting and administrative requirements than other retirement plans and, as such, they are an attractive option for employers with limited resources and personnel to handle benefit administration and compliance issues.

SIMPLE IRAs permit employees to make tax-deferred contributions through payroll deduction to traditional individual retirement accounts set up under the plan. In 2024, the contribution limit is $16,000 ($19,500 if age 50 or over). All account earnings are tax deferred until the plan participant begins withdrawals at retirement age. Withdrawals from a SIMPLE IRA are taxed at regular income tax rates.

SIMPLE IRAs are structured so that employee contributions go into an IRA set up under each employee’s name. That way, all money contributed to the IRA account becomes immediately vested. The employee can take the money along if he or she changes employers.

Employers are required to contribute annually to the plan either a matching contribution of up to 3% of pay or a 2% non-elective contribution for each eligible employee. Under the “non-elective” contribution formula, even if an eligible employee does not contribute to their SIMPLE IRA, that employee must still receive an employer contribution to their SIMPLE IRA equal to 2% of their compensation up to the annual limit of $330,000 for 2024.

Transfers and Withdrawals
Strict requirements apply to employee early withdrawals and transfers. Employee SIMPLE IRA accounts must be open for two years before the employee can move the money in the account or take it out. Employees who withdraw or transfer money in a SIMPLE IRA account that has been open for less than two years will face a 25% early withdrawal penalty on the amount transferred or withdrawn on top of federal income taxes.

Employer Requirements
Employers can establish a SIMPLE IRA once they meet the following requirements:

• The plan is available to any small business, generally with fewer than 100 employees.
• It can be established by adopting Form 5304-SIMPLE, Form 5305-SIMPLE, a SIMPLE IRA prototype, or an individually designed plan document.
• The employer must not have any other retirement plan.
• The employer must make contributions to the plan.
• Employees must be permitted to make tax-deferred contributions to the plan.
• The employee must be always 100% vested in the plan.

Plan Benefits

• Employee contributions are tax deferred.
• Employer contributions to employees’ SIMPLE IRAs are tax deductible.
• Account earnings are tax deferred.
• No annual filing requirement or discrimination testing is necessary.

Possible Disadvantages

• Employer contributions are mandated.
• No Roth contributions are permitted.
• Full vesting is immediate (employee has ownership of all SIMPLE IRA money).
• No loans are permitted.

If you are interested in exploring what type of retirement plan may be suitable for your business’s needs, be sure to reach out to your financial and tax professionals. They can be invaluable in helping you assess your retirement plan options.

Once a retirement savings plan has been approved and is in place, it’s tempting to sit back and adopt an “I’m done,” hands-off attitude. However, to ensure that a plan will continue to operate effectively, employers should periodically review plan provisions and features. Here are some points to check.

• How the plan is presented. The more convinced employees are of the wisdom of saving for retirement, the greater the level of employee participation. The greater the participation, the more the plan can benefit all employees — including highly compensated ones. Regular meetings, newsletters, and handouts are effective means of communicating plan advantages. Check to make sure printed materials are up to date and easy to understand, and distribute them frequently.
• Plan investments. Employers that sponsor participant-directed plans can limit potential legal liability for losses caused by employees’ investment decisions if plan investment choices meet certain requirements under Section 404(c). Very generally, where 404(c) protection is sought, a plan should offer at least three “core” investment choices, allow employees to switch investments at least once each quarter, and provide participants with adequate disclosure of specified investment information.
• Administration. Participants and beneficiaries must be given a copy of the Summary Plan Description (SPD) within 120 days after a plan is adopted or within 90 days after becoming eligible to participate in the plan or receive benefits. Review the SPD to make sure it accurately describes the provisions of your plan. If changes have been made to the plan document — which is likely, given the recent tax law changes — then all participants must receive a notification of these changes within 210 days after the end of the plan year in which the changes were adopted. Generally, all participants must receive a copy of the SPD every five years.
• Summary annual reports (SARs). Summary annual reports must be distributed to participants within nine months after the close of the plan year. If a plan receives an extension to file its annual report (Form 5500) with the IRS, then the SAR must be distributed within two months after the end of the extension.
• Plan rollovers. Qualified plans must allow a participant to elect direct rollover of any eligible distribution to an IRA or another employer-sponsored retirement plan. Your plan should have procedures in place to handle direct rollovers.
• Bonding. Generally, plan fiduciaries and others who handle the assets of a plan must be bonded. The bond must be equal to at least 10% of the funds handled by the bonded individual, but cannot be for less than $1,000 and need not be for more than $500,000.
• Loans to participants. Loans that are not properly administered may be treated as constructive distributions resulting in taxable income to the recipients. Review loans to make sure that loan balances do not exceed the maximum limitations. Unless used to finance the purchase of a principal residence, all loans must be repaid within five years. A plan may impose more stringent conditions on loans than the law requires.
• Plan forms. All forms should meet current requirements. Forms that may need updating include beneficiary designation forms, benefit election forms, and the notice of distribution options.

It’s smart to make a point of reviewing your retirement plan account statement in detail at least once a year. You’ll want to ensure that the information in your statement is accurate and assess whether you should make any changes in your contribution level or investments going forward.

Ensure Personal Details Are Correct

To start your review, check the following for accuracy:

• Personal information (e.g., name, address, phone, etc.)
• Hire date (since it can affect vesting)
• Contribution amounts (yours and your employer’s, if applicable)
• Investment instructions
• Beneficiary designation

Review Your Investments’ Performance

Any large change — up or down — in one investment market can impact your portfolio’s overall asset allocation.* Consider rebalancing** your portfolio at least once a year so that the percentages you have invested in stocks, bonds, and cash alternatives remain in line with your desired asset allocation.

As a retirement plan investor, your investment goals are typically long term. As such, you may decide to allocate a greater percentage of your portfolio to stock funds*** since a longer investing horizon gives your portfolio more time to recover from any short-term declines in the stock market. However, if there have been changes in your financial situation — for example, you have experienced a job loss, or you have had to deal with large, unexpected expenses — you may have less tolerance for investment risk than before. If that’s the case, you may choose to lower your exposure to higher risk investments in your portfolio.

One of the best ways to measure your portfolio’s performance is to compare your investments to benchmarks. Benchmarking helps put performance in perspective. For example, it can be disturbing when a fund you own has a negative return. However, it doesn’t seem so bad if the fund’s comparable index dropped by a similar percentage.

Likewise, if the overall market fell 10% while your fund only fell by 5%, you would understand that your fund did well in the circumstances. However, if your fund earned returns of 5% during a period when its benchmark rose by 15%, then you may want to examine whether continuing to hold that fund makes sense.

Portfolio Turnover Rate

The term portfolio turnover rate refers to the percentage of a mutual fund’s holdings that changes over a given period of time. Certain types of stock funds may have high turnover rates because they pursue aggressive or growth strategies. Other types — value funds, for example — may have lower turnover rates.

It can be a red flag if a fund’s portfolio turnover rate is much higher than that of other funds in the same style category and the fund consistently underperforms similar funds and its benchmark. Portfolio turnover rate is just one of the many factors investors should review when assessing funds in their portfolios.

Management Fees

Mutual funds charge management fees to help cover the expenses of operating the fund. Typically, management fees are used to compensate the investment managers who select and monitor the fund’s investments. Deciding whether to continue owning a mutual fund based on how much it charges in annual management fees is a subjective judgement. If the management fees are higher than those of other comparable funds and the fund’s performance demonstrates no appreciable difference, then it might be worth looking deeper into the issue.

Work With a Professional

Reviewing your retirement plan account statement can help identify strengths as well as deficiencies in your retirement planning and allow you to respond accordingly. Your financial professional can also be a valuable partner in ensuring that you are on the right track to a financially solid retirement.

Your retirement plan gives you the flexibility to change your investment choices if you consider it appropriate to do so. When does it make sense to add or subtract from your holdings in one or more funds in your plan account? Here are some times when you might consider making a switch.

When Your Retirement Is Drawing Closer

Making your investment decisions based on the number of working years you have ahead of you is key to successful retirement investing. So, too, is basing your investing decisions on your tolerance for investment risk. Younger participants with many years left until retirement may be able to take on a higher level of investment risk since their long-term investment horizon gives them time to ride out any downturns in the investment markets. As you near retirement you probably can’t afford to take excessive risk with your retirement assets.

If you plan to retire in five years or less, it may be appropriate to shift from a strategy of growth to one that seeks to protect your assets. By emphasizing asset preservation, part of your retirement plan portfolio may be protected if the stock market falls significantly.

When Your Tolerance for Risk Changes

It’s important to have a long-term perspective as a retirement plan investor since the market can have periods of volatility. However, your tolerance for the market’s fluctuations may change due to unforeseen financial occurrences throughout your life — the loss of a job, the need to save for a child’s college education, or a health crisis. If it does, you may want to review your asset mix to see if you can restructure your portfolio so that you are more comfortable with its risk level.

When Your Portfolio Needs to Be Rebalanced

You choose how to allocate the investments among the different asset classes in your retirement plan account by considering your time frame for investing, your tolerance for investment risk, and other assets you may own. However, any change — up or down — in one investment class can throw your allocations off balance. When that occurs, you may want to rebalance your retirement plan portfolio to reestablish the percentages you had initially allocated to stocks, bonds, and cash investments. You may have to sell some investments and buy others to achieve the rebalanced plan account you originally constructed.