Question

Jonathan owns and operates a deli restaurant in New York City. It is a family business and all of the employees are family members. Jonathan wants to establish a retirement plan so he can save for retirement and the retirement of his employees on a tax deferred basis. Jonathan only wants to contribute to the plan when the business makes a profit. He is happy to contribute on behalf of his employees if the business is doing well. He wants to limit administrative fees. You have been hired to recommend a plan for Jonathan

o Examine the risks associated with your recommendation and the ways Jonathan can mitigate these.

Answer 1

One of the biggest risk factors Jonathan faces is the costs associated with his plan. If Jonathan decides to match his employee’s contributions every year, this could certainly become costly. However, there are some benefits to matching employee contributions. Contributions on Jonathans end are also tax deferred and he may receive favorable tax treatment for matching his employee’s contributions. Matches are, however, discretionary which can give Jonathan the flexibility he is looking for.

Conclusion

Overall, the best option for Jonathan to offer his employees would be a Direct Contribution Plan in which his employees make most of the contributions. Jonathan can opt to match his employee’s contributions when he has a good year economically. This will also encourage his family members to save for retirement. Jonathan will also benefit from this with favorable tax treatment for the years he does contribute. As for himself, Jonathan can use a traditional Roth IRA and begin saving at any time. Jonathan may benefit from outsourcing his administration of the 401k accounts depending on how many employees he has. Outsourcing may open the door to other investment avenues such as high interest rates and index funds. This financial retirement plan will ultimately help Jonathan to save for his own retirement, while also looking out for his family members as well. This is the best give he could possibly give himself or his employees.