If you’re a small business, offering a SIMPLE IRA plan as a retirement benefit can be a great way to attract and retain employees. For you, the employer, it is low-cost and easy to set up and administer. As an added benefit, matching is a tax-deductible business expense. For employees, a SIMPLE IRA allows them to save more than with a personal IRA and enjoy the benefits of a matching plan.
But if your business is growing, it may be time to consider switching from a SIMPLE IRA plan to a 401(k) plan. Here are some indicators to help assess if it is time to change plans:
More EmployeesSIMPLE IRA plans only allow up to 100 employees in a company, so if you are nearing that number, you will need to consider a 401(k) plan. It is also economically more attractive for companies and their employees to have a 401(k) plan as the number of employees increases.
More Flexibility
A 401(k) plan allows for more flexibility for both the employer and employees. The SIMPLE IRA does not allow employees to borrow from their plan, whereas a 401(k) plan does. Also, employees can contribute more into a 401(k) plan. A SIMPLE IRA plan only allows up to $12,500 annually, while a 401(k) plan allows up to $18,500 annually. Both plans allow catch-up contributions for employees over the age of 50. The maximum catch-up contribution for the 401(k) plan is $6,000, while it is only $3,000 for the SIMPLE IRA. In addition, employers are required to make contributions to the SIMPLE IRA, but it is not a requirement for the traditional 401(k) (Safe harbor and SIMPLE 401(k) plans do, however, require employer contributions).
More Control
A 401(k) plan has more oversight and management by the company through the plan administrator, trustees and advisor. The SIMPLE IRA plan has very little or no oversight pertaining to fees, investment selection and replacements, and employee education and guidance. Also, a 401(k) plan has extensive online reports for management, trustees and employees that allow for better management of the plan.
Moreover, 401(k) plans are governed by an underlying Plan Document by which the plan must abide, and employees must adhere to the plan rules. A SIMPLE IRA Plan is much less structured, and therefore, may lead to poor decisions resulting in diminished retirement savings.
Finally, employees are immediately vested with a SIMPLE IRA, which means they have no incentive to stay with a company based on its retirement plan. A 401(k)- vesting schedule tends to keep people from moving quickly to a new company, and if they do leave, the remaining employees benefit.
More Savings
The more employees you have, the more cost effective a 401(k) plan becomes, since SIMPLE IRA plans are based on a per person basis. With a 401(k) plan, there are economies of scale that deliver more support and services, as well as lower pricing.
Small businesses may also qualify for a business tax credit to reimburse start-up costs associated with establishing a 401(k) plan.
In short, you may have outgrown your SIMPLE IRA plan if any of these issues have become a factor for you: Your company is nearing 100 employees, your employees want more flexibility in borrowing from their plan and want to contribute more money, you want more control of the assets in the plan, and/or you can reap benefits from economies of scale of a 401(k) plan.
Is it time to make the switch? If you are thinking of moving from a SIMPLE IRA to a 401(k) plan, you should speak with a qualified retirement plan financial advisor who can go through the options, details and implications of changing plans. Making the change requires a professional team to get the job done, and a plan conversion from a SIMPLE IRA to 401(k) plan will take approximately 90 days. Get started today by contacting a Richard Brothers Financial Advisor now.
