Qualified retirement plans are often the cornerstone of individual savings since they afford participants the opportunity for tax-deferred and, in some instances, tax free growth. Business owners typically sponsor a plan because they wish to provide their employees a benefit and because they recognize that offering a plan is essential to attracting and retaining good employees.
Another common key motivation for owners in sponsoring a plan, particular those of smaller companies, is the desire to avail themselves of the tax advantages qualified plans provide. Depending on the company and the plan design, owners have the ability to make large annual tax deferred contributions and realize greater compound growth in a way that could not nearly be replicated in an IRA, for example.
There are generally two types of qualified plans, defined-benefit plans and defined contribution plans. In a defined benefit plan, the contributions are made solely by the employer, and the Internal Revenue Code (IRC) limits the amount of benefits that can ultimately be paid out. By contrast, in a defined contribution plan such as a 401(k) the contributions can come from both the participants and the sponsor, and the IRC limits the amount of contributions that may be made per year. Determining which plan is right ultimately depends on the size of the company, the size of the payroll, and the objectives of the owners.
While sponsoring a plan is often a necessity or at least great advantage to a business, doing so comes with the added legal responsibility of becoming a fiduciary to the plan participants. Reducing sponsors' burden and helping them navigate the many questions that can come up, 5th Street Advisors provides fiduciary advisory services and consulting expertise to employers seeking to establish a retirement plan for their business or change their existing plan.