Deferred Compensation Plans Can Help Your Employees Save More and Help Your Company Attract and Retain Top Employees
Have you ever had a problem but didn’t think there was a solution, so you never asked for help? We all have.
Here’s what I mean: Imagine life 100 years ago. You’re riding a horse around. You knew the limitations of a horse and some of the challenges (clean up!) but until you saw the automobile, you didn’t know what was possible. Now think about life before the iPhone vs. now. Big difference, right?
This is what happens when I explain Deferred Comp Plans (Deferred Compensation Plans) to clients. Most people have heard of them but no clients knew they could have one and what all the benefits would be.
Some of my clients had a problem when I first began working with them as their 401k Advisor. They didn’t mention it at first because they didn’t know there was a solution. They just figured “that was the way it is”. The previous advisor or broker never mentioned it probably because they weren’t aware there was a solution either.
Here are just a few examples of problems they faced:
- Higher paid employees want to contribute more to their 401k each year but they are limited. That was frustrating.
- The company 401k was failing annual testing so that lowered what the higher paid employees were able to contribute annually. Some even got “excess contributions” which is a return of contributions and now they had to pay taxes on that income. That was even more frustrating.
- To remain competitive in today’s market, the employer was thinking of a strategy, besides simply offering more pay, to retain key employees as well as attract new talent.
They hired me to help improve their 401k plan but in the end we accomplished so much more.
After learning of these problems, I explained what a deferred comp plan (or what I call a “401k mirror”) is. I listed some benefits below. If these benefits are attractive, a deferred comp plan might make sense for your company.
Deferred Comp Plan – Potential benefits for employees:
- Employees can save more for retirement – This is in addition to what they defer into a qualified plan (e.g., 401k plan, Simple IRA, SEP IRA, Profit Sharing Plan), and there aren’t any contribution limits.
- Employees may reduce their current year taxable income – Deferrals are pretax, so they can delay paying taxes on more of their current compensation. I see employees substantially reduce their tax liability as a result.
- Their savings could grow tax deferred – This increases the potential to grow, because taxes aren’t reducing them every year.
- They may increase their retirement income – All of this works together and creates the potential for more income when they retire.
Deferred Comp Plan – Potential benefits for your company:
- Attract the talent you need – Offering more than just the normal benefits and addressing key employees’ unique concerns can encourage them to consider your company.
- Give key employees incentive to stay – For any amounts the company credits to employees’ accounts, you can apply a vesting schedule.
- Choose who gets to participate – Unlike a qualified plan, you don’t have to offer it to everyone. And there’s no annual testing to fail.
- Flexibility in funding it – You can use your employees’ deferred amounts or company cash to informally fund the plan.
- You own and control the assets – This gives you more flexibility when it comes to financing the plan.
- No annual testing – Yes, there are no worries about failing your annual testing (like a 401k plan) because there is no testing.
Let’s admit it, running a successful business is more challenging than ever before. Competitors are coming at you from all directions, the technology landscape is constantly changing, and government regulations make it even more difficult. A tool to attract and retain top talent might be just what you need.
Potential Risks to keep in mind when considering Deferred Compensation Plans.
- Many plans do not allow the participant to access the money early.
- Find out how we design our plans to allow employees to access their money before retirement.
- Employees might have risk of loss.
- Find out how we design our deferred comp plans to mitigate this risk.
- Employees that withdraw their entire account in a lump sum could trigger a big tax bill.
- Let’s discuss how we design plans to help clients with this tax bill risk
As you can see, a Deferred Comp Plan might be able to help your employees save more and help your company attract and retain the top employees in your industry.
Would you like a review of your current 401k Plan?
Discuss your retirement plan with a 401(k) specialist.