Key Considerations When Designing a Retirement Plan

For many business owners today, retirement planning is something they feel is important for both their own and their employees’ financial future. Retirement planning enables individuals to set goals for their retirement income and then develop and implement a plan to help them achieve those goals.

It’s common for those employers who believe in the importance of retirement planning to offer a retirement plan as part of their benefits package. Many prospective employees have come to expect it — which can put employers who don’t offer a retirement plan at a distinct disadvantage when it comes to attracting and retaining top talent.

How business owners approach retirement planning

When it comes to their own retirement planning, business owners often have several common objectives — and these often inform how they design their retirement plan offerings. These objectives may include asset protection and accumulation, as well as estate preservation. Achieving tax savings¹ is also a critical consideration for many.

Because no two business owners are alike, what will work in one employer’s retirement plan offering may not work for another’s. It all comes down to the business owner’s specific goals, objectives, and budget.

Two primary types of retirement plans

Qualified plans are designed to accumulate assets for retirement. The two main types of qualified retirement plans are defined benefit plans and defined contribution plans.

A defined benefit plan promises a specified monthly benefit at retirement. With this type of plan, the company funds and pays its obligations for each of its participating employees.

A defined contribution plan does not promise a set monthly benefit at retirement. Instead, the employee and/or employer contribute to the employee’s account within the plan. The contributions are invested on the employee’s (i.e., participant’s) behalf, and the participant ultimately receives the balance in the account.

The most common type of defined contribution plan is the 401(k) plan, which allows an employee to save some of his or her wages for retirement and have the savings invested while deferring income tax on contributions and earnings until withdrawal.

While 401(k) contributions were traditionally made on a pre-tax basis, beginning in 2006, 401(k) plan providers were given the ability to offer after-tax Roth accounts, which enable participants to make after-tax contributions. If certain requirements are met, these contributions, along with their investment earnings, are tax free upon withdrawal. Today, it’s common for 401(k) plans to offer both pre-tax and Roth contribution options.

What are the differences between the two plan types?

In addition to the benefit/cash available at retirement, access to retirement funds is one of the main differences between the two plan types. With a defined contribution plan, the employee may not have access to his or her funds until:

• the employee leaves the employer;
• the employee dies or becomes disabled;
• the employer terminates the plan;
• the employee reaches age 59½; or
• the employee suffers financial hardship.

Depending on the plan design, defined contribution plan participants may be able to borrow money from their account by taking out a plan loan.

With a defined benefit plan, a participating employee does not typically have access to any plan funds, except to receive retirement benefits at the date specified under the plan. These are most commonly paid out on a monthly basis.

Another primary difference is how these two types of plans are funded: Employers are responsible for funding defined benefit plans, whereas employees primarily fund defined contribution plans.

Funding a retirement plan with life insurance

While business owners often use cash flow to finance their retirement plan offerings, a qualified retirement plan may incorporate life insurance on the lives of the plan’s participants² to help fund the plan.³ This can be an excellent way for business owners to save money, while protecting their loved ones and assets, using pre-tax dollars. Various types of life insurance may be used, depending on the business owner’s objectives and budget — including term life insurance, permanent life insurance, and survivorship life insurance.

The benefits of using life insurance in a qualified plan

There are many reasons to consider life insurance in a qualified plan, such as:

• Premiums are tax-deductible.
• Policy proceeds pass income tax-free to the beneficiary: Life insurance proceeds pass to a beneficiary income tax-free to the extent they exceed the policy’s cash surrender value.^{4, 5}
• Policy proceeds pass estate tax-free when paid to the spouse.
• The plan is self-completing: If the individual insured under the policy dies before retirement, the life insurance policy will provide all, or substantially all, the monies that would have been available at retirement.
• Asset protection: The assets in an ERISA plan are protected from the claims of judgment creditors. This extends to the life insurance policy.⁶ 
• Portability: The participant can take the policy with them at retirement.

In conclusion

Offering an attractive retirement plan is one way that today’s employers compete for top talent. But because retirement planning is a complex topic, be sure to work with a financial professional as well as your tax and legal advisors to consider the type of plan(s) that may work best for your company — along with the funding options that can provide you and your employees with the benefits you’re looking for.

Disclaimer:

Prepared by The Guardian Life Insurance Company of America. The information contained in this article is for general, informational purposes only.

Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. This article is intended for general public use. By providing this content, The Guardian Life Insurance Company of America and their affiliates and subsidiaries are not undertaking to provide advice or recommendations for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact a financial representative for guidance and information that is specific to your individual situation.