The SIMPLE IRA contribution limits are only determined by your age. When you’re below 50 it is $11,500 per year and when you’re over 50 it is $14,000 per year. The SIMPLE IRA (SIMPLE stands for Savings Incentive Match Plan for Employees) is designed for small employers typically with less than 50 employees. The advantage of the SIMPLE IRA for the small business is it’s cheaper to manage than a traditional 401k and still allows the company to offer incentives to contribute. The disadvantage is there are typically fewer choices for the employees offered and the SIMPLE IRA contribution limits are lower.
If you intend to match 3% of your employees’ contributions then they would be applying 6% of income to their retirement accounts. As long as your employees make less than $192,000 per year the average employee won’t come anywhere near the max contribution of the SIMPLE IRA. Even if an employee is following a common financial advisor suggestion of 15% of income to retirement the employee won’t be able to max out this plan until they make nearly $80,000 per year. Plus they still could spill some of this retirement savings into a traditional or ROTH IRA. The SIMPLE IRA contribution limits are acceptable for most employees’ retirement plans.
So what are the disadvantages to choosing a SIMPLE IRA versus a Traditional 401k? The biggest difference is the contribution limit as discussed earlier. Another disadvantage is the employees can’t loan from their retirement accounts as you can do with a 401k. The next disadvantage is managing companies won’t give your employees as many options to invest in. The last disadvantage for the employer is you must contribute. There must be a match to employee contributions or a fixed percent of income give regardless of match.
So what should your employees who take advantage of a standard match expect out of their retirement? If your employee earns $40,000 per year and works for you for the traditional 20 years, invests 3% of his income and you match 3% of his income, and earns a typical 8% per year the employee will have a nest egg of $118,000. This is where employee investment training needs to come in play. That $118,000 is probably worth more like $60,000 in today’s dollars. If this is all the employee is planning for retirement and they manage to get debt free before retirement, this $60,000 will only provide them with $5,000 per year safely. Obviously this is only food money for 1 and not much else. The employee really needs to understand what is needed to be sacrificed in order to retire comfortably. If they sacrifice 15% of their income plus your 3% match they’ll earn more along the lines of $356,000 or $180,000 in today’s dollars. This will provide $15,000 per year which combined with social security can cover basic living needs.
Since the days of the company pension plan are over you need to provide your employees with both a self managed plan and the education to fund it correctly.