As summer draws to a close, Americans begin thinking of backyard barbecues and making one last trip to the lake or beach. Labor Day is also a good time to evaluate your own labor in the bigger picture — what is the motivation behind all that work? For most, the answer involves one major goal: saving enough for a secure retirement.
The Retirement Enhancement and Savings Act (RESA), currently under consideration by Congress, offers individuals and business owners more options to help them build retirement savings. And unlike many other potential changes to the Tax Code, RESA has significant bipartisan support and therefore stands a good chance of becoming law.
Better access and incentives for small businesses
The bill takes a multi-faceted approach in spurring retirement saving. The first focuses on Multiple Employer Plans (MEPs), which can lower the cost to employers of offering retirement plans for their employees. In practice, however, the rules governing MEPs create barriers that discourage many businesses from participating.
Provisions in RESA eliminate the requirement that all member businesses share a common interest (such as different branches of the same company). Also, current law makes an entire MEP subject to disqualification if one member violates plan requirements, which increases the risk for all plan members. RESA sets the bar for disqualification higher, so more employers may be willing to join.
Another set of legislative tweaks within RESA enhances the financial incentives available to small businesses that begin to offer retirement plans and to those that provide auto-enrollment for their employees. These incentives are in the form of tax credits, which small-business owners will no doubt appreciate that tangible reward.
RESA helps individuals build lifetime income
RESA would make changes intended to help individuals make better saving decisions, too. Retirement statements would be required to include information about how their nest egg translates into lifetime income. Armed with a realistic estimate of what they will have to work with, individuals may be more motivated to save for their golden years.
Another aspect of the new law would improve portability by limiting fees and surrender charges when an individual moves from one plan to another. Additionally, RESA would create a safe harbor provision for fiduciaries selecting a lifetime income provider. Plan sponsors have hesitated here because the long timeframe creates risk; the proposed safe harbor should help them feel more comfortable selecting lifetime income products and providers.
Business owners can take action now
Even if Congress fails to act, small-business owners can pursue a more comfortable retirement — and help their employees do the same. Offering some type of retirement plan may build loyalty among your valuable employees or help you recruit the next generation of employee.
Business owners with just a few employees can implement a SIMPLE IRA. These low-cost retirement plans offer tax-advantaged savings options and require matching contributions from employers of 1% to 3% of wages. Larger companies might consider a traditional 401(k) or a safe harbor 401(k). The latter is not subject to the annual compliance testing that can impede savings for high-income employees in traditional 401(k) plans.
For self-employed business owners who work alone, including contractors, a solo 401(k) offers exceptional flexibility. These plans allow alternative investment types such as real estate and let plan owners borrow from accumulated funds. If the business expands to include one or more full-time employees, then the solo 401(k) plan converts to a traditional 401(k) that also covers employees. SEP IRAs are another versatile and low-cost option for self-employed individuals who want to build assets for retirement.
Bring everyone to the table
Whether on your own or as a company leader, talking about saving now may help you and the rest of your team enjoy plenty of labor-free days in retirement. Saving for retirement should be a matter you are comfortable discussing with family and employees. But don’t forget to invite someone to the party who knows the subject inside and out. Turn to the advisors at CRI for help creating and implementing a retirement saving strategy that fits your business perfectly.