From simple to 401(k): choosing an employee retirement plan.

• Author: Lewers, Christine
• Position: RETIREMENT PLANNING

AS AN EMPLOYEE-benefits specialist with Swartz Retson--a Merrillville accounting firm with an employee benefits practice in Merrillville--Joy Kakta works with a variety of businesses to set up employee retirement plans.

"They usually come to Swartz Retson with some ideas already about what they want," says Kakta, adding that very often businesses say they want a plan that will be easy to explain to employees. "What they don't realize are the complexities of it."

The first step is to learn about the types of plans available, their costs and the commitment each requires in terms of set-up, funding and administration. It's also important for companies to understand the different types of retirement plan services they'll need, how to choose the investments for the plan and how to evaluate fees.

In general, there are two broad categories of plans: defined-contribution plans, which include SEP-IRAs, SIMPLE-IRAs, 401(k)s and profit- sharing plans; and defined-benefit plans, which include traditional pension plans. Defined-contribution plans do not promise a specific amount of income for retirees, whereas defined-benefit plans promise regular retirement income that is usually tied to employees' earnings and years of service. In general, companies are moving away from traditional pensions because of their high cost and difficulty to fund.

For companies with one or more employees, Simplified Employee Pension Plans (SEP-IRAs) are a simple-to-set-up and easy-to-administer option. A two-page IRS form gets the ball rolling. The plans are virtually free to start and have limited IRS filing requirements. These plans allow employer-only contributions of up to 25 percent of compensation (capped at $45,000 per employee for 2007) into accounts. The primary cost to companies is the contribution, which is tax-deductible. Business owners decide on funding levels year-to-year, making SEPs a good option for weathering years when profits dip.

SEP-IRAs are often an attractive option for sole proprietors because their contributions limits rival those of more complicated plans. For companies with employees, SEP-IRAs are a no-strings-attached way for businesses to help workers fund their golden years. The catch is all employees must benefit in the same way; for the most part, companies with SEPs are required to include all employees 21 and older in the plan, and vesting is immediate. Employees own the IRAs and decide for themselves where to invest the funds.

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