The Best Employee Retirement Plans of 2020

In our search for the companies with the best employee retirement plans, we knew we wanted to find providers that serve small business and offer quality plans that are affordable for both business owners and employees. We also wanted the plans to be easy to set up and manage. To this end, we looked for retirement services with the following features.

• Services for small and very small businesses: Not every employee retirement plan provider works with small businesses. Some require you to have thousands or even millions of dollars in fund assets. We looked for services that work with businesses that have just a few employees and don't yet have any plan assets.

• Fiduciary responsibility, where applicable: Small business 401(k) plans have strict federal regulations, so we looked for retirement plan companies that do the heavy lifting for you and provide plan administration, record-keeping, and advisory services as part of their offering and cost.

• Pricing posted on company's website: This makes it easy for you to determine whether or not a plan is within your budget and saves you the time of calling the company for this information.

• Competitive costs: We know that price is one of your top concerns about sponsoring a plan, so we looked for plans that have lower costs and fewer fees while still delivering a quality retirement product.

• Patient customer service: Many small business owners haven't been plan sponsors before, and there's a lot to learn before making the decision to offer a workplace retirement plan. For this reason, we included customer service in our testing and considered how easy it was to get a rep on the phone, how willing they were to share their knowledge of retirement plans, and how patient they were in answering our many questions.

There are several different types of 401(k) and IRA employee retirement plans that you can sponsor for your small business. Your accountant or tax advisor can help you decide which is the best option for your small business, based on your financial situation, number of employees and personal retirement goals.

401(k) plans: This is the most popular type of employee retirement plan because it has higher contribution limits for employees and offers a choice of pretax or Roth contributions. Plan varieties include traditional 401(k), safe harbor 401(k) and individual 401(k).

IRA plans: These plans usually have lower contribution limits than 401(k) plans but are also easier and less expensive to set up and maintain. Most brokerages offer both employer-sponsored IRAs and personal IRAs that can supplement workplace-sponsored retirement plans. Plan varieties include traditional and Roth IRAs, SIMPLE IRAs, and SEP IRAs.

Here we've listed some factors that may help you quickly identify the type of retirement plans for small business that you want to learn more about. Before choosing a plan, be sure to consult your financial planner and tax advisor for advice specific to your business needs.

Consider the following plan types if you have employees and …

• Want to make Roth contributions: traditional 401(k) and safe harbor 401(k)
• Want to make higher contributions for yourself (and key employees, if applicable): safe harbor 401(k)
• Prefer not to match or make contributions to employee accounts: traditional 401(k)
• Want a basic plan that allow employees to contribute: SIMPLE IRA
• Want a plan that doesn't require yearly contributions: SEP IRA

Check out these plan types if you don't have employees and …

• Want a retirement plan that anyone can set up: traditional and Roth IRA
• Want to maximize savings by contributing to your retirement plan as both an employer and employee: individual 401(k)
• Want to maximize savings, but only want to make contributions as an employer: SEP IRA

Traditional 401(k)

This plan doesn't require employers to match employee contributions, but those who do are allowed to set a vesting schedule that encourages employees to stay with the company. 

Costs: For this plan, charges often include a one-time setup fee, monthly or annual administrative and per-employee fees, and an investment or advisory fee.

Pros:

• Employers are not required to match participant contributions.
• Employer contributions are tax deductible as a business expense.
• Employers may set a vesting schedule to encourage employee retention.
• The contribution limits for employees are higher.
• Employees can elect to make salary deferrals or after-tax contributions.
• Contributing participants may qualify for the saver's credit on their income tax return.
• Loans are available to plan participants.

Cons:

• The plan can be more complex to set up and administer.
• It requires filing IRS Form 5500 (Annual Return/Report of Employee Benefit Plan).
• It requires annual nondiscrimination testing to make sure the plan doesn't favor highly compensated employees.

Contribution structure and matching requirements: This plan allows optional contributions from both employees and employers.

• Employee elective deferrals for 2019 are capped at $19,000, though catch-up contributions up to $6,000 are allowed for employees aged 50 and over. Employee contributions are 100% vested.
• Employers aren't required to offer matching contributions for this plan, but if they do, they have the option to set a vesting schedule for their contributions. They may choose to contribute up to 25% of compensation for eligible employees. The total contribution limit for 2019 – including both employee and employer 401(k) contributions – is $56,000, or $62,000 for employees age 50 and over. However, this plan is subject to nondiscrimination testing, which may require the business owner and highly compensated employees to reduce their contributions.

Rules and deadlines: This plan can be established up to the last day of the initial plan year (usually Dec. 31). Typically, this type of plan is available to all employees age 21 and over who worked 1,000 hours or more in the last year. Participants can make withdrawals from this plan without penalty after age 59.5. Required minimum distributions (RMDs) begin the year the participant turns 70.5 years of age.

The following retirement plan companies offer traditional and Roth 401(k) plans for small businesses: ADP, ShareBuilder 401k, Guideline, Human Interest, Paychex and Vanguard. 

Safe Harbor 401(k)

Many small business owners favor this type of plan because it allows them and their key employees to maximize their own retirement contributions.

Costs: This type of plan often has a setup fee, administrative fees, per-participant fees, and an investment or advisory fee.

Pros:

• Employer contributions are tax deductible as a business expense.
• It doesn't require annual nondiscrimination testing.
• It has higher contribution limits for employees.
• Employees may defer salary or make Roth contributions.
• Contributing participants may qualify for the saver's credit on their income tax return.
• Loans are available to plan participants.

Cons:

• It can be more complex to set up and administer.
• It requires filing IRS Form 5500.
• The employer must match or contribute to employee accounts.
• It doesn't allow employers to set a vesting schedule.

Contribution structure and matching requirements: Employers must match or contribute to employee accounts. Employees contributions are optional.

• Employee contribution limits for 2019 are $19,000. Catch-up contributions of up to $6,000 are allowed for employees aged 50 and over. Employee contributions are 100% vested.
• Employer contributions are required for safe harbor 401(k) plans. They must match either 4% for participating employees or 3% for all eligible employees, and these contributions are immediately 100% vested. However, this plan type doesn't require nondiscrimination testing, so the business owner and highly compensated employees can maximize their contributions. Employers may contribute up to 25% of compensation. The total contribution limit for 2019 (including both employee and employer contributions) is $56,000, or $62,000 for employees age 50 and over.

Rules and deadlines: The establishment deadline for safe harbor 401(k) plans is Oct. 1. This plan is usually available to all employees, age 21 and older, who worked 1,000 hours or more in the last year. Participants may withdraw funds without penalty after age 59.5 but must begin withdrawing funds the year they turn 70.5 years of age to avoid being penalized with a 50% tax on the RMD.

The following retirement plan companies offer safe harbor 401(k) plans for small businesses: ADP, ShareBuilder 401k, Guideline, Human Interest, Paychex and Vanguard.

Individual 401(k)

This type of plan, also called a solo 401(k) or i401(k), is best for high-earning, self-employed individuals with no employees (apart from a spouse) who want to invest as much as they can into their retirement plans. It allows a sole proprietor to contribute as both employee and employer. 

Costs: The fees you pay for this type of plan vary by provider. Some have a setup fee, monthly or annual administrative fee, and an investment or advisory fee. Others don't charge a setup fee but have ETF and mutual fund expense ratios and charge for fund trades or have annual fund service fees (though these may be waived, depending on your account balance). Some also require a minimum opening deposit.

Pros:

• Employer contributions are tax deductible as a business expense.
• There is a Roth (after-tax) option for employee contributions.
• The contribution limits are high.
• No nondiscrimination testing is required.

Cons:

• It can be more complex to set up and administer.
• No loans are available from this type of plan.
• It requires filing IRS Form 5500-EZ or 5500-SF when your account has more than $250,000 in assets.

Contribution structure and matching requirements: This plan allows self-employed individuals to make contributions as both the employee and the employer.

• Employee contribution limits for 2019 are $19,000, plus a catch-up contribution of $6,000 for individuals aged 50 and over.
• Employer contribution limits for 2019 are up to 25% of your self-employment income, with a total defined contribution limit (including both employee and employer contributions) of $56,000, or $62,000 for individuals age 50 and over.

Rules and deadlines: Individual 401(k) plans must be established by Dec. 31 or the end of the fiscal year. This plan type is only available to self-employed individuals with no employees (with the exception of a spouse who works for the business). As with nearly every retirement plan, you must be age 59.5 to withdraw funds without a tax penalty, and you must begin withdrawing funds at age 70.5 to avoid an expensive RMD tax penalty.

The following retirement plan companies offer individual 401(k) plans for small businesses owners: ShareBuilder 401k, Fidelity and Vanguard.

Traditional and Roth IRAs

This plan type isn't a workplace-sponsored retirement plan. Rather, it's designed for individuals and can be used in addition to workplace-sponsored retirement plans. 

Costs: Usually, there aren't any setup or administrative fees for the plan sponsor, but participants pay trading fees and fund expense ratios.

Pros:

• There are no setup or administrative costs.
• It's easy to set up and maintain; it doesn't require tax filing or compliance testing.
• Roth IRA funds grow tax-free and have no RMD.
• Traditional IRA contributions may be tax deductible if you don't have a workplace-sponsored retirement account or if your modified adjusted gross income (MAGI) doesn't exceed certain limits.
• It accepts rollovers from other retirement plans.
• Contributing participants may qualify for the saver's credit on their income tax return.

Cons:

• Both traditional and Roth IRAs have low annual contribution limits.
• Only one rollover per year is allowed, though there are some exceptions to this rule.
• No loans are available from this type of plan.

Contribution limits: Whether you have a traditional or Roth IRA, the contribution limit for 2019 is $6,000. A catch-up contribution of $1,000 is allowed if you're age 50 or older.

Rules and deadlines for traditional IRAs: Traditional IRAs can be opened at any time, but contributions for the year must be made by the due date for filing your tax return (typically April 15 without extensions). Individuals with earned income above $6,000, or $7,000 for those over age 50, can contribute to a traditional IRA. However, there is an age limit for this type of account – those who are age 70.5 by the end of the year may not open a traditional IRA. You can withdraw funds without penalty after age 59.5 and must begin withdrawing funds the year you turn 70.5 to avoid a 50% RMD excise tax.

Rules and deadlines for Roth IRAs: Like traditional IRAs, Roth IRAs can be opened at any time, but annual contributions must be made by the tax filing deadline (April 15). There are some restrictions on the Roth IRA for high-income individuals, but there isn't an age limit. You must be age 59.5 to withdraw funds from your IRA without paying an additional 10% tax on investment earnings. Additionally, Roth IRAs must be held a minimum of five years before withdrawing funds. Unlike with most retirement accounts, you aren't required to withdraw funds as long as you live. After you die, your beneficiaries must begin withdrawing funds to avoid RMD fines.

The following retirement plan companies offer traditional and Roth IRAs to individuals: Fidelity and Vanguard.

SIMPLE IRA

A Savings Incentive Match Plan for Employees, also known as a SIMPLE IRA, can be set up by self-employed individuals and small business owners with 100 or fewer employees.

Costs: This plan usually has no setup fee and few administrative costs (some may be waivable). Participants pay trading fees and fund expense ratios. Optional advisor services may be available for an extra fee.

Pros:

• It's easy to set up and maintain; it doesn't require IRS 5500 tax filing or nondiscrimination testing.
• Employer contributions are flexible.
• Employer contributions are tax deductible as a business expense.
• As with individual 401(k) plans, self-employed individuals with no employees can contribute to this plan as both employee and employer.
• Contributing participants may qualify for the saver's credit on their income tax return.

Cons:

• Employers must match or contribute to employee accounts.
• Employer contributions are immediately 100% vested.
• Contribution limits are lower than with other types of workplace-sponsored retirement plans.
• No loans are available from this type of plan.

Contribution structure and matching requirements: Employers are required to match or contribute to employee accounts. Employee contributions are optional.

• Employees may contribute up to $13,000 in 2019. Those age 50 and over may also make catch-up contributions of $3,000.
• Employers must either match up to 3% for participating employees or make a 2% contribution to all employee accounts. Those who choose to match can reduce their contributions to 1% in any two out of five years.

Rules and deadlines: SIMPLE IRAs must be established by Oct. 1. All employees whom you've paid at least $5,000 during previous years, or expect to pay this year, are eligible to participate in this type of plan. Plan participants may begin withdrawing funds at age 59.5 without paying a 10% additional tax. However, participants must hold the account for at least two years before making withdrawals to avoid a higher 25% additional tax. Participants must begin withdrawals the year they turn 70.5 to avoid a 50% RMD excise tax.

The following retirement plan companies offer SIMPLE IRA plans for small businesses: ADP, Fidelity and Vanguard.

SEP IRA

Simplified Employee Pension Plans, commonly referred to as SEP IRAs, can be set up by self-employed individuals as well as business owners with employees.

Costs: There often isn't a setup fee for this plan. There may be administrative or service fees, though they may be waivable. Participants pay trading fees and fund expense ratios. Optional advisor services may be available for an extra fee.

Pros:

• Setup and administrative costs are low.
• It's easy to set up and maintain; it doesn't require tax filing or compliance testing.
• Employer contributions are tax deductible as a business expense.
• Employers don't have to contribute to this plan every year.

Cons:

• Employers must contribute the same percentage of compensation for every participant.
• Employer contributions have immediate 100% vesting.
• Employees cannot contribute to this plan.
• No loans are available from this type of plan.

Contribution structure and matching requirements: Employers can choose which years they contribute to employee accounts. Employees' retirement contributions are not permitted.

• Employees are not allowed to make contributions under this plan. However, they can boost their retirement income by making contributions to a traditional or Roth IRA.
• Employers must make contributions for all eligible employees, using the same salary percentage. For 2019, the contribution limit is the lesser of 25% of the employee's compensation or $56,000. Contributions are 100% vested.

Rules and deadlines: Although SEP IRAs are often thought of as a retirement plan option for small businesses, there's no limit on the size of business that can offer them. SEP IRAs must be established by your business's tax filing deadline (usually April 15, unless you've filed an extension). All employees who are age 21 or older, have worked for you for at least three out of the last five years, and have earned at least $600 during the year are eligible to participate in this plan. Participants may withdraw funds without penalty after age 59.5 but must begin withdrawals the year they turn 70.5 to avoid a hefty RMD tax.

The following retirement plan companies offer SEP IRA plans for small businesses: ADP, Fidelity and Vanguard.

The information presented in this article is general and is not financial, legal or tax advice. You should consult your CPA, financial advisor, or tax attorney for investment and retirement plan advice specific to your business and personal situation.

As a small business employer, why should I care about offering a retirement plan?

Sponsoring a retirement plan for your employees is a big step for a small business. Here are four factors to consider that can help you determine whether offering a retirement plan is strategically a good fit for your business.

1. It helps you attract and retain talent. As the country enjoys low unemployment rates and skilled workers are in high demand, offering a retirement plan as part of your benefits package helps you compete against larger companies to attract and keep top talent.

2. It gives you tax advantages. If you haven't offered a retirement plan before and have fewer than 100 employees, you may be eligible for the Retirement Plans Startup Costs Tax Credit. For the first three years of your plan, you're credited up to 50 percent of plan startup and administration costs, up to $500 per year. If you choose to match contributions, they're tax deductible. You may also be able to lower your personal income tax bracket by participating in the plan. You should consult your CPA or tax advisor to get information about the tax implications for your specific business as well as your personal finances.

Upcoming federal legislation may offer additional tax credits to small businesses that automatically enroll their employees in a retirement plan. It may ease other regulations as well, making it easier for small business owners to offer this benefit to their employees.

3. It helps you save for your own retirement. You're allowed to participate in the plan you sponsor, and you'll be able to save more money for retirement than if you set up a traditional or Roth IRA. Many small business owners choose the safe harbor 401(k) because it allows them to max out their own retirement contributions when they match or contribute to employee accounts. Again, you should speak with your CPA or financial advisor to find out how you can maximize your retirement savings under the plan you select for your business.

4. Your state may (soon) require it. Some states have passed, or are in the process of passing, legislation that requires businesses to either provide retirement plans for their employees or register with the state and allow employees to participate in a state-sponsored plan. Employers choosing the latter would be required to submit employee payroll contributions to the state, but as of this writing, they wouldn't be required (or allowed) to contribute to employee plans. They would, however, face penalties for noncompliance. They also wouldn't receive the tax credits for sponsoring a plan of their own.

California, Illinois and Oregon have already begun implementing such legislation in phases, starting with larger businesses. Small businesses will also be subject to this legislation. For example, California will require compliance from businesses with just five or more employees by June 2022.

Connecticut, Maryland and Massachusetts have passed legislation to form state-run plans. New Jersey and Washington plan to offer online marketplaces where small business owners can shop for retirement plans for their businesses.

How much will a retirement plan cost my business?

Costs vary, depending on how many employees will be participating in the plan, the type of plan you choose, and the retirement plan company (or companies) that you work with to help you run the plan. You should also consider whether or not you will match or contribute to employee IRA or 401(k) accounts.

How much can a small business owner contribute to a 401(k)?

For 2019, employees can contribute up to $19,000. Employees age 50 and older can make an additional $6,000 catch-up contribution. Contribution limits for employers cannot exceed 25% of the employee's compensation. However, the overall limit for a defined contribution plan that includes both employee-elected deferrals and employer contributions.