Regardless of if retirement is right around the corner or decades from now, it is critical that both you and your employees have a concrete plan of action in place. Have you considered offering a money purchase pension plan (MPPP) as part of your offered retirement benefits? In the content below, we define money purchase pension plans, explore the associated pros and cons, and discuss when MPPPs work as an alternative to other pension and retirement plans.
Money Purchase Pension Plans: What Are They?
Money purchase pension plans (MPPPs) are a type of defined contribution plan. In an MPPP, the employer contributes money to a retirement account on behalf of the employee. The money is invested and saved for when it will be withdrawn by the employees in their later years after they retire from work.
The employer can contribute as much money as they see fit. However, if they want their employees to be able to invest for retirement, then there are limits on how much money can be set aside each year under IRS guidelines.
Top Pros and Cons of MPPPs
When deciding which retirement benefits to offer your employees, there’s so much to consider. It has been reported that MPPPs are considerably less common than other types of plans and pensions available because there are restrictions associated with the money purchase method. However, there are many individuals that can benefit from MPPPs.
To help you figure out if MPPPs are best for your employees and their retirement planning, we explore five pros and four considerations below.
Pro: Supplemental Retirement Income
Employees with MPPPs may also take part in the money purchase pension plan as a supplement to their 401(k). This type of plan can be advantageous because there is no guarantee that one’s contributions will even be enough to get them through retirement without having any income sources other than social security benefits or investments outside of their retirement account.
Pro: Lower Administrative Costs
MPPPs have lower administrative costs than traditional pensions. This benefits your employees as the individual because there are no benefits to be paid out in retirement.
Pro: No Automatic Deductions
Money contributed through an MPPP isn’t automatically deducted from a paycheck like with a traditional pension. If you determine that money is tight in the future, you can change this at any time and keep more of your money for yourself.
Pro: Contributions can be Stopped
As MPPPs are voluntary, your employees can stop contributing at any time without penalty!
Pro: Higher Investment Returns
MPPPs have higher investment returns than other retirement accounts because they are not limited to just one type of strategy or index fund. Alternatively, money is placed into a variety of different funds to try and maximize money.
Consideration: Contributions Can Be Taxed Twice
Contributions made through an MPPP will likely be taxed in two different ways. First, they will be taxed at the time of contribution, and then again when money is withdrawn in retirement.
Consideration: Did Your Employees Invest Enough?
While money is automatically deducted for traditional pensions, MPPPs require your employees to contribute on their own. If they don’t start early enough, it could have a negative impact in the future!
An area of caution to consider is if you believe you do not have enough money saved for your future retirement (a plausible outcome for those who invest or plan poorly), then this might not be the right option for you either!
Consideration: Do Your Employees Plan to Retire Early?
There can be disadvantages for employees who leave their job before they turn 59 ½ or die, as funds will not accumulate until that event occurs.
No money purchase pension plan is perfect, but they can be a good option for an employer who does not want to offer benefits like health insurance. For those with high retirement goals (e.g., people aiming for early retirement), this may not be the best choice!
Therefore, be sure to consider your employees’ need and desires before eliminating alternative retirement plan benefits.
Consideration: Is There an Employer Match?
If you are considering money purchase pension plans, it is important to consider offering a matching contribution as the employer. If not, money purchase pension plans will be more difficult for employees to fund, and they may need to diversify their investments in other ways.
When Do MPPPs Work as an Alternative to Other Pension and Retirement Plans?
For employees who are nearing retirement and have not yet established an adequate level of savings through tax-sheltered programs or other investments, they can look to MPPPs as an alternative retirement plan. Money purchase pension plans can serve as a sufficient alternative to other long-term savings vehicles like 401(k)s or 403(b)s.
Additionally, employees with MPPPs have some flexibility in when they decide to retire, as their retirement benefits may include a lump sum at the time of conversion rather than monthly payments. Again, the contingency to this is that they retire at the age of 59 and 1/2 years or older.
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