Retirement benefits can help employers retain employees and foster a thriving workplace culture. However, helping secure the financial future of an entire workforce is a significant commitment. Employers must understand how to select, structure and maintain a retirement plan that works for both the business and its employees.
Table of Contents
Understanding retirement planning for businesses
What is retirement planning?
Retirement financial planning is the process of choosing, structuring and managing retirement savings benefits. When done effectively, this process makes retirement benefits attractive to employees and easy to administer. Well-structured plans also help ensure compliance with legal requirements.
Why is retirement planning important to businesses?
Retirement plans can have a significant impact on talent acquisition and retention. They also present tax incentives for businesses.
Talent acquisition and retention
Offering a comprehensive retirement plan signals that a company cares about its people and their financial futures. As a result, the business becomes a more attractive destination for high-performing talent. Employees who join the organization may also be more engaged, productive and loyal knowing they have financial security.
Tax incentives
Contributions made by an employer to employee retirement plans are often tax-deductible, which can reduce the overall taxable income for the business. Under the SECURE Act, small businesses may also be eligible for start-up tax credits when implementing new retirement plans, which can offset the costs of setting up and administering the plan.
Key components of retirement planning
Selecting the right retirement plan
With various retirement options available, selecting the right plan depends on business size, employee demographics and budget. Tailoring the plan to meet these unique factors is crucial to its success.
Simplifying administration with automation
Technology, like ADP’s SMARTSync®, integrates payroll and retirement savings accounts, making it easier to automate plan contributions via payroll deductions. This capability reduces administrative tasks, streamlines operations and mitigates errors. It also improves transparency because employees can track their savings progress in real time and adjust their contributions to meet their goals.
Offering tailored investment options
Employees have diverse financial goals and varying risk tolerances. Some may prefer higher-risk, higher-reward investments, while others may lean toward more conservative funds. Offering a range of investment choices empowers them to make decisions that suit their life stages and financial situations.
ADP’s Open Fund Architecture, for instance, provides access to more than 13,000 investment options from top fund managers. Employees can personalize their portfolio accordingly, whether they are looking for aggressive growth or stability. Options are also available for those who want help making their investment selections.
Encouraging participation
Employer contributions are highly effective at increasing plan participation rates because they help employees save more and improve their financial wellness. There are two types:
- Matching contributions – The employer contributes a percentage of an employee’s contributions to the retirement plan.
- Non-elective contributions – The employer contributes to all plans regardless of whether the employee does.
A common contribution is 3% of the employee’s salary, even if the individual chooses not to contribute.
Risk management
Offering a variety of investment options allows employees to choose the level of risk that matches their specific needs. For example, younger employees may be interested in investing aggressively to help maximize their retirement savings. Older employees, on the other hand, often seek greater stability in their portfolios as they approach retirement age.
Target-date funds, diversification and automatic rebalancing can help employees find the right balance between risk and return.
What are target-date funds?
Target date funds (TDFs) generally invest in a mix of stocks, bonds, cash equivalents and potentially other asset classes, either directly or via underlying investments. The asset allocations automatically adjust as an employee's retirement date nears, providing a more conservative investment strategy while still allowing for growth. By automatically adjusting the underlying investment mix, TDFs also help reduce the risk of inattention to rebalancing and realignment.
What is diversification?
Diversification means spreading investments across different asset classes, e.g., stocks, bonds, etc. The risk of poor performance in any single investment is minimized because it’s balanced with assets that perform differently in the same market environment. This approach can help employees safeguard their retirement savings as they near their goals, but does not assure a profit or protect against market loss.
What is automatic rebalancing?
Automatic rebalancing is the process of periodically adjusting a portfolio to restore its original investment mix. This step is necessary because portfolios can become riskier than intended when certain assets outperform or underperform. Employees who are not engaged in managing their retirement accounts often need automatic rebalancing to help ensure their portfolio shifts towards more conservative investments as they age.
Compliance and fiduciary responsibilities
Federal regulations, such as the Employee Retirement Income Security Act (ERISA), require employers to adhere to fiduciary standards when managing retirement plans. Some of the requirements include the following:
- Keeping fees reasonable
- Meeting compliance requirements
- Ensuring that plan options are in the best interest of employees
Fulfilling these obligations involves designing appropriate retirement plans, regularly reviewing investment options and providing all necessary disclosures.
Retirement planning strategies: Tailoring retirement plans based on business needs
The right retirement plan strategy depends on business size, industry and workforce demographics.
Small businesses: Simple solutions with big impact
Setting up a retirement plan that is cost-effective and easy to manage is often a priority for small businesses. Two attractive options are the safe harbor 401(k) and the SEP IRA.
Safe harbor 401(k)
Unlike traditional 401(k) plans, safe harbor 401(k) plans automatically meet non-discrimination testing requirements. This feature greatly simplifies compliance for small business owners. Safe harbor 401(k) plans are also appealing to employees because employer contributions are immediately vested.
SEP IRAs
The inherent flexibility of SEP IRAs is ideal for small businesses with fluctuating revenue. They can contribute more to the plan during profitable years and reduce contributions in leaner times without compromising the quality of the retirement benefit. Their employees, however, cannot contribute to a SEP IRA.
Midsized companies: Flexibility to meet growth
Midsized companies often benefit from flexible retirement structures that can adapt to an evolving workforce. For example, offering a profit-sharing plan alongside a traditional 401(k) allows employees to contribute to their retirement, while the company makes additional contributions based on profitability. This balanced approach rewards employees for their hard work while aligning their success with the company’s financial health.
Large enterprises: Advanced planning and employee engagement
Large companies with diverse and often complex workforces require advanced retirement planning strategies. They usually benefit from plans that offer flexibility, scalability and personalized engagement tools to ensure that employees across multiple demographics are enrolled and actively contributing to their retirement savings. HR analytics may also be necessary. By harnessing data, employers can fine tune their retirement plans and communication tactics to increase participation rates.
What are the steps in retirement planning for businesses?
Creating and maintaining a successful retirement plan involves several foundational steps to ensure it meets business needs and employee expectations.
1. Assess business goals and workforce needs
Employers must first assess the amount of contributions their business can sustain and how a retirement plan aligns with broader objectives, like recruitment and retention. They should also consider workforce demographics, like employee income levels and long-term financial goals. Surveys and industry benchmark data can provide valuable insights in this regard.
2. Choose the right plan type
Employer contributions levels, compliance obligations and investment options all factor into choosing a retirement plan. Business size is also critical. For smaller companies, safe harbor 401(k)s or SEP IRAs are ideal because they offer high contribution limits with minimal administrative complexity. Midsized and large organizations may prefer more complex plans, such as traditional 401(k)s with employer matching or profit-sharing features, which provide higher contribution ceilings and more flexibility.
3. Implement a sustainable contribution strategy
Non-elective contributions are easier to administer and ensure that all employees benefit, but they may come with higher overall costs for employers. Matching contributions, on the other hand, encourage employees to save more, but may lead to lower total participation if some employees choose not to contribute. Understanding the balance between these options is key to maximizing employee engagement while keeping costs manageable.
4. Ongoing management: Compliance and employee education
Managing a retirement plan doesn’t stop after it’s established. Ongoing compliance checks and fiduciary reviews help ensure the plan continues to meet regulatory standards and remains in employees' best interests.
Employee education plays an equally important role. HR teams should engage employees regularly by providing information on how to maximize contributions, understand the investment options available and assess their retirement readiness.
ADP delivers everything you need to manage retirement benefits and help employees meet their saving goals.
Learn MoreM-625788-2024-10-18
ADP, Inc. owns and operates the ADP.com website. Unless otherwise disclosed or agreed to in writing with a client, ADP, Inc. and its affiliates (ADP) do not endorse or recommend specific investment companies or products. Please consult with your own advisors for such advice. Investment options are available through the applicable entity(ies) for each retirement product. Investment options in the “ADP Direct Products” are available through either ADP Broker-Dealer, Inc. (ADP BD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ 07068 or (in the case of certain investments) ADP, Inc. Only registered representatives of ADP BD may offer and sell ADP retirement products and services or speak to retirement plan features and/or investment options available in any ADP retirement products.
