How do I choose a retirement plan?

A: Workers used to be able to rely on Social Security payments as a major source of retirement income. But that's no longer the case. Americans are living longer and could spend up to 30 years or more in retirement.

Fortunately, there are a number of ways for business owners and employees to save for the future—and many retirement plans from which to choose.

A retirement plan offers important advantages to business owners: 1) tax-deductible contributions to the plan reduce your tax bill; and 2) positioned as part of your total benefits package, it's a valuable recruiting tool.

In general, retirement plans fall into two categories—defined-benefit and defined-contribution plans.

With a defined-benefit plan, each participant's retirement benefit is determined by the formula set forth in the plan, which is all funded by the employer. Employer contributions vary, and the plan sponsor takes on the investment risk.

With a defined contribution plan, an employees' benefit is the amount of assets in the individual account at retirement. These plans can be structured to include employee contributions as well as employer contributions. Some of the plans available include simplified employee pension plans (SEPs), profit-sharing plans, 401(k) plans, and savings incentive match plans for employees (SIMPLEs).

A SEP is for business owners seeking a flexible, low-cost retirement plan that is easy to establish and maintain. Each eligible employee sets up an individual retirement account (IRA) into which the employer makes contributions. Since the employees each have their own individual accounts, they bear the investment risk. This plan is especially desirable for new businesses or companies with cyclical profits, since the employer can vary the amount contributed from year-to-year—or not contribute at all in less profitable years.

A profit-sharing plan is for business owners seeking more flexibility in plan design than is available in a SEP. Although both plans can be structured to allow contributions to vary each year, a profit-sharing plan can have additional features, such as a vesting schedule to reward longer-term employees, loan provisions and various methods to allocate contributions.

For employers who want their employees to share in the funding of their retirement plan, a 401(k) plan may be a viable choice. A 401(k) is a form of profit-sharing plan that allows employees to make salary deferral contributions. In addition, the employer may choose to make matching and/or discretionary contributions.

SIMPLE is for businesses with 100 or fewer employees that do not currently contribute to a retirement plan. It enables a business owner to establish a 401(k)-type savings plan without the costs and complexities of a traditional 401(k). A SIMPLE plan can be established either as an IRA or as a 401(k) plan. Employees can elect to make salary deferral contributions. In addition, the employer is required to make contributions each year under one of two formulas.

Whether you want to establish a retirement plan for the first time or have your existing plan evaluated, you should consult with a professional to help you identify investment alternatives and programs best suited to your needs and those of your plan and your employees. Planning for retirement is far too important to put off.

Richard A. Moras, Financial Advisor UBS Financial Services Inc. 847/498-7703, richard.moras@ubs.com