Employer-sponsored retirement plans vital for women

Women business owners, especially those who may not have a traditional pension or other retirement plan in place, face an extremely important issue securing retirement for themselves and their employees.

Traditionally, women both business owners and employees show more concern about their financial security in retirement than men do. Merrill Lynch surveys have shown that women, in general, are more concerned about maintaining financial independence in their retirement years.

As a business owner, there is much you can do to help yourself and your employees save for retirement.

Let's take a look at the need for women to ensure a financially secure retirement and how that goal can be achieved.

A gender gap

For many women, the challenge of planning for retirement is compounded by a persistent gender gap:

The earnings gap. Men generally hold jobs that pay more. Women's earnings equal about 77 percent of men's earnings. according to the U.S. Department of Labor.

The retirement savings gap. Because women often leave the workforce to assume childcare or eldercare responsibilities, they often receive smaller pensions than men. Many never become fully vested in retirement plans because, on the whole, women change jobs more frequently than men, according to the Social Security Administration.

The life expectancy gap. On average, women can expect to outlive men by seven years, according to the United States Administration on Aging.

Ironically, women's longer life expectancy means women may actually need to accumulate more in retirement savings than men, even though they may have a lesser opportunity to do so. That's why personal savings and savings accumulated through employer-sponsored plans are so critical a part of the saving equation for women.

In a recent survey conducted by the Employee Benefit Research Institute, 44 percent of women said they expect a major source of their retirement income will be money they have saved through a retirement plan at work. In addition, 40 percent expect money provided by an employer to be a major source.

Sponsoring a plan

Employers may not be aware of how convenient and cost-effective it can be to sponsor a retirement plan, or of how doing so can benefit a business. More than 1 million businesses with 100 or fewer employees offer a retirement plan, according to the Department of Labor, and 81 percent of the employees in these businesses choose to participate.

To choose a retirement plan for a company, the owner should consider the objectives in establishing a plan, whether it is to attract and retain great people, improve morale among employees, gain significant tax advantages for the business, or maintain flexibility in making employer contributions to a plan.

In addition, an employer needs to determine which plans to consider and also to evaluate the business's ability to maintain a retirement plan. Factors that influence this evaluation include the company's age, size, and profit levels and cycles.

Qualified retirement plans

The following are some of the plan options and their relevance to businesses today:

Profit-sharing plan. Profit-sharing plans are often preferred by companies with unpredictable cash flow and those that do not want to commit to fixed annual contributions. In this type of plan. contributions may be discretionary and are allocated among participants based on compensation.

Money purchase pension plan. Money purchase pension plans may be appropriate for companies with predictable income that can commit to a mandatory annual contribution. The employer's contribution is usually based on a specified percentage of each participant's compensation, regardless of the profitability of the company.

Profit-sharing/money purchase combination plan. By combining a profit-sharing plan with a money purchase pension plan, a business can contribute greater amounts in more profitable years. yet still limit its contribution obligation to the money purchase pension plan in more difficult years.

401(k) plan. Generally, a 401(k) plan is appropriate for companies that want employees to share in funding their own retirement.

Participants in this defined-contribution plan contribute a percentage of pre-tax income, reducing their current tax liability. The company can. at its discretion, make profit-sharing contributions or matching contributions.

Defined benefit plan. This type of plan seeks to provide fixed, periodic retirement benefits usually for life to employees who meet the plan's requirements. Employer contributions are mandatory and are based on a number of actuarial assumptions, including compensation, age. years of service and life expectancy. Recent legislation has removed a limitation on defined benefit plans that may mean a greater opportunity for employers to put money away for retirement and to gain tax deductions for the business.

Simplified employee pension plan. An SEP plan may be particularly suitable for a business that is new or has variable profits. It is inexpensive to establish and administer. There are generally no Form 5500 reporting requirements and contributions are 100 percent vested immediately.

Incentive Match Plan for Employees. This plan is for employers with 100 or fewer employees who do not maintain a qualified retirement plan. A SIMPLE may be adopted as a SIMPLE Retirement Account plan or as part of a 401(k) arrangement. Plan participants make contributions that must be combined with an employer contribution.

Depending on individual needs, an employer can choose employee-benefit plan support services that make retirement plan sponsorship easier, including plan design, recordkeeping services and help with choosing investment options.

Ask for guidance

Time and the right retirement planning strategies will go a long way toward helping women make their retirements more secure. Once an employer decides to sponsor a retirement plan, an accountant, tax adviser or financial adviser can help weigh the advantages and benefits for the company.

With the guidance of the financial adviser, the employer will be able to pinpoint the plan that will help him or her and employees as well reach their financial and retirement goals.

(H. McIntyre Gardner is first vice president and head of Benefits and Investment Solutions for Merrill Lynch.)