Spectra Associates, Inc.
1016 Mill Creek Drive
Feasterville, PA 19053
Phone - 215-953-1520
Fax - 215-953-8650

Types of Retirement Plans

 

There are many different types of retirement plans. Any entity, incorporated or not, with just one employee or over 100,000, can sponsor a retirement plan. The advantages of offering a plan include attracting employees, enhanced employee loyalty, deductible corporate contributions, possible tax deferral of salary and the ability to set aside funds for retirement on a tax-advantaged basis. The type of plan a company implements depends on the goals, profitability, and demographics of the company. Given a company's employee census, we can develop multiple proposals showing the advantages and differences between each type of plan. 

To start a retirement plan, the company must adopt a plan document then administer the plan within rules set forth by the Internal Revenue Service and Department of Labor. As a third party administrator Spectra can design your plan as well as perform the ongoing administration of the plan.

 

Listed below are some of the main types of plans and a brief description of each.

 

Defined Benefit Plan

Under this type of plan, the company promises to pay a lifetime monthly benefit to all eligible participants starting from the time they reach retirement age. This type of plan is commonly known as a pension plan. The contribution required each year must be calculated and certified by an enrolled actuary. The main advantage of a defined benefit plan over other types of plans is that the annual deductible contribution can be much higher and be more advantageous to the older principals of the company.

 

Defined Contribution Plan

In a defined contribution plan, each participant maintains an account balance. The account balance reflects company contributions, possible contributions from the participant, gains or losses from the investments in the trust, and any withdrawals. Unlike defined benefit plans, there is no promise of receiving a lifetime monthly benefit at retirement age. The value of their account at retirement age is the benefit. The advantage of a defined contribution plan is greater flexibility of annual contributions.

 

There are two main types of defined contribution plans.

 

Profit Sharing Plan

There is great flexibility in a profit sharing plan. The company generally can decide after the close of the year what contribution, if any, it will make to the plan. There are numerous formulas that can be used to allocate the contribution to the eligible employees. Some are simply based on the salary of each eligible participant. Others are more complex involving both the salary and age of each participant. Plans with formulas involving participant ages are sometimes called "age-weighted" or "new comparability" plans.

401(k) Profit Sharing Plan

A 401(k) profit sharing plan has everything that a regular profit sharing plan has with an additional element. Each eligible participant can opt to defer part of his or her salary directly into the plan. This deferral is not subject to federal income tax. As it is still a profit sharing plan, the company has the option to make contributions to all eligible participants over and above the deferrals. Also, the company has the option to make matching contributions, for those participants who opt to defer part of their salary.


The following plan has characteristics similar to both defined contribution and defined benefit plans

 

Cash Balance Plan

A cash balance plan has the account balance feature that a defined contribution has. But it also has features of a defined benefit plan, specifically, larger contributions skewed toward older principals. A cash balance plan is usually adopted along with a 401(k) plan to maximize the benefits available.

 

 

Please contact us for more information specific to your company's needs.