Exploring the Benefits and Drawbacks of Association Retirement Plans for Small Business Owners

March 23, 2023 · 18 min read

"The new Association Retirement Plan rule will make it easier and more affordable for small businesses to offer retirement benefits to their employees, helping more Americans save for a secure retirement." - Alexander Acosta

Brief Insight

Association Retirement Plans (ARPs) are a type of retirement plan designed for small businesses that share a common industry or interest. By pooling together, these businesses can benefit from economies of scale and offer their employees access to retirement benefits that would be difficult to provide on their own. ARPs were established by the US Department of Labor in 2019 as a way to expand access to retirement benefits for workers in the small business sector.

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Association Retirement Plans: A Solution for Small Business Retirement Benefits?

Association Retirement Plans (ARPs) are a type of retirement plan designed for small businesses that share a common industry or interest. By pooling together, these businesses can benefit from economies of scale and offer their employees access to retirement benefits that would be difficult to provide on their own.

ARPs were established by the US Department of Labor in 2019 as a way to expand access to retirement benefits for workers in the small business sector. The goal was to address the fact that many small businesses struggle to offer retirement plans to their employees due to the high cost and administrative burden.

Under the ARP structure, multiple small businesses can join together to form a single retirement plan. This allows them to achieve cost savings and efficiencies by spreading the administrative and investment management expenses across a larger pool of participants. The businesses that participate in the ARP are known as "member employers," and they can be any type of business, such as a trade association, chamber of commerce, or other professional organization.

One of the key benefits of ARPs is that they can offer participants access to lower-cost investment options that are typically only available to larger plans. By pooling their assets, ARPs can negotiate lower fees and expenses with investment managers, which can result in significant cost savings for participants.

Another advantage of ARPs is that they are subject to fewer regulatory requirements than traditional retirement plans, such as 401(k)s. This can make them easier and less expensive to administer, which is particularly beneficial for small businesses with limited resources.

However, there are also potential drawbacks to consider. For example, ARPs are not as well established as traditional retirement plans, and there may be less information available about their investment options and performance. Additionally, because the plan is shared among multiple businesses, there may be less flexibility in terms of plan design and customization.

Overall, ARPs can be a useful tool for small businesses looking to offer retirement benefits to their employees. By pooling together, these businesses can achieve economies of scale and provide access to retirement benefits that might not be otherwise possible. However, it is important for businesses to carefully evaluate the costs, benefits, and risks associated with an ARP before deciding whether to participate.

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Interesting Facts

ARPs are a relatively new type of retirement plan, created in 2019 as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

ARPs are designed to offer small businesses and self-employed individuals an alternative to traditional retirement plans, with lower costs and simplified administration.

To be eligible for an ARP, you must be a member of an association that sponsors the plan. The association can be a trade or professional organization, a chamber of commerce, or other similar groups.

Association Retirement Plans: A New Option for Small Business Retirement Benefits

Association Retirement Plans (ARPs) were created by the US Department of Labor in July 2019. The aim of ARPs is to help small businesses that share a common industry or interest to join together to offer retirement benefits to their employees.

The establishment of ARPs was in response to a growing concern about the retirement savings crisis in the United States. Many Americans, particularly those who work for small businesses, do not have access to employer-sponsored retirement plans. This leaves them without a reliable source of retirement income and puts them at risk of not being able to afford basic necessities in their later years.

ARPs were created to address this problem by making it easier and more affordable for small businesses to offer retirement benefits to their employees. By pooling together, these businesses can benefit from economies of scale and offer their employees access to retirement benefits that would be difficult to provide on their own.

Overall, ARPs represent a new option for small businesses to offer retirement benefits to their employees. While they are not suitable for every business, they can be a useful tool for those that are looking to provide retirement benefits in a more cost-effective and efficient manner.

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How Association Retirement Plans Are Funded: A Look at Contributions and Investment Options

Association Retirement Plans (ARPs) are funded through contributions made by both the employer and the employee. Under an ARP, the participating businesses, known as member employers, contribute to a single retirement plan on behalf of their employees. The contributions can take the form of either pre-tax or after-tax dollars, depending on the plan design.

The employer contribution is typically a percentage of the employee's salary, and it is up to the member employer to determine the contribution rate. However, there are some limits and regulations around the maximum contribution amount, which are set by the IRS. Employee contributions, on the other hand, are voluntary and can be made through payroll deductions.

Once the contributions are made, the funds are invested in a range of investment options chosen by the plan fiduciaries. The goal of the investment strategy is to generate returns that will help grow the retirement savings of plan participants over time.

It's worth noting that there are some costs associated with administering an ARP, such as record-keeping fees and investment management fees. However, because the plan is shared among multiple businesses, the costs are spread across a larger pool of participants, which can result in lower costs overall.

Overall, ARPs are funded through a combination of employer and employee contributions, which are invested in a range of investment options. By pooling their assets, ARPs can offer access to lower-cost investment options and achieve cost savings through economies of scale.

Last Trends

Expansion of eligibility: The Department of Labor finalized a new rule in 2020 that expanded eligibility for ARPs to certain working owners without employees, such as sole proprietors and partners in a partnership.

Increased popularity: ARPs have become increasingly popular in recent years, as more small businesses seek cost-effective and flexible retirement plan options.

Understanding the Administration of Association Retirement Plans

The administration of an ARP involves several key steps to ensure that the plan is properly established, maintained, and compliant with applicable laws and regulations.

Step 1: Establishing the ARP

The first step in administering an ARP is to establish the plan. This involves selecting a plan provider and working with them to design a plan that meets the needs of the participating businesses and their employees. The plan must be established in accordance with the rules and regulations set forth by the Internal Revenue Service (IRS) and the Department of Labor (DOL).

Step 2: Enrolling Participating Employers

Once the ARP has been established, participating employers must be enrolled in the plan. This involves providing them with information about the plan and its benefits, as well as explaining the contribution and investment options available to them. Employers must also complete any required paperwork and provide information about their employees who will be participating in the plan.

Step 3: Managing Employee Accounts

Once employees have been enrolled in the plan, their accounts must be managed. This includes processing contributions, ensuring that investment options are available and appropriate, and providing employees with regular statements and other information about their accounts. It may also involve assisting employees with making investment decisions and providing education and guidance about retirement planning.

Step 4: Monitoring Compliance

ARPs are subject to various laws and regulations, including those set forth by the IRS and the DOL. As such, it is important to monitor the plan to ensure that it remains compliant with all applicable rules and regulations. This may involve conducting periodic audits, submitting required reports to government agencies, and making any necessary changes to the plan in response to regulatory updates or changes.

Step 5: Communicating with Participants

Finally, effective communication with plan participants is key to the successful administration of an ARP. This includes providing employees with regular updates about the plan, responding to their questions and concerns, and providing them with education and guidance about retirement planning.

Administering an ARP involves a range of activities, from establishing the plan to managing employee accounts and monitoring compliance. Effective communication with plan participants is also essential. By following these steps and working with a qualified plan provider, small businesses can offer their employees a valuable retirement benefit that can help them achieve their long-term financial goals.

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Exploring the Services Provided by Association Retirement Plans

ARPs offer a range of services to both participating employers and their employees.

Plan Design and Setup

ARPs work with participating employers to design and set up retirement plans that meet the specific needs of their employees. This includes selecting investment options, determining contribution levels, and establishing plan rules and regulations.

Investment Management

ARPs provide investment management services to ensure that employee contributions are invested in a diversified portfolio of securities that are appropriate for their retirement savings goals. This includes selecting and monitoring investment options and providing employees with information about investment performance and risk.

Recordkeeping and Administration

ARPs handle the administrative tasks associated with managing retirement plans, such as processing contributions, maintaining participant accounts, and providing regular statements and other communications to plan participants.

Compliance and Reporting

ARPs ensure that retirement plans are compliant with all applicable laws and regulations. This includes filing required reports with government agencies, conducting periodic audits, and making any necessary changes to the plan to remain compliant with regulatory updates or changes.

Education and Support

ARPs provide education and support services to plan participants to help them make informed decisions about their retirement savings. This includes providing access to financial planning resources, retirement calculators, and other tools that can help participants make informed investment decisions.

Cost Savings

ARPs may be able to offer cost savings to participating employers by pooling resources and spreading administrative costs across multiple businesses. This can help small businesses offer retirement benefits that are competitive with those offered by larger employers.

ARPs offer a range of services to participating employers and their employees, including plan design and setup, investment management, recordkeeping and administration, compliance and reporting, education and support, and cost savings. By working with a qualified ARP provider, small businesses can offer their employees a valuable retirement benefit that can help them achieve their long-term financial goals.

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Interesting Facts

ARPs can offer several types of retirement plans, including 401(k) plans, Simplified Employee Pension (SEP) plans, and Savings Incentive Match Plan for Employees (SIMPLE) plans.

ARPs can help small businesses compete with larger companies in attracting and retaining talent by offering a retirement benefit.

ARPs must comply with the same regulations as other retirement plans, including ERISA (the Employee Retirement Income Security Act) and IRS regulations.

Understanding Eligibility for Association Retirement Plans

Association Retirement Plans (ARPs) are designed to provide retirement benefits to employees of small businesses that might not otherwise have access to such benefits. The following individuals and entities may be eligible to participate in ARPs:

Small Businesses

ARPs are designed for small businesses, which are defined as those with 100 or fewer employees. This includes sole proprietors, partnerships, and corporations.

Self-Employed Individuals

Self-employed individuals may also be eligible to participate in ARPs, as long as they have no employees other than themselves and their spouses.

Trade and Professional Associations

Trade and professional associations may establish ARPs on behalf of their members, as long as the members are small businesses or self-employed individuals.

Geographic Regions

ARPs may also be established for businesses located in a specific geographic region, such as a city, county, or state.

Industry-Specific Groups

ARPs may also be established for businesses in a specific industry, such as healthcare or manufacturing.

It is important to note that eligibility requirements may vary depending on the specific ARP provider and plan design. Some ARPs may have additional eligibility requirements, such as minimum participation levels or length of time in business.

ARPs are designed to provide retirement benefits to small businesses, self-employed individuals, trade and professional associations, geographic regions, and industry-specific groups. By working with a qualified ARP provider, eligible entities can offer their employees a valuable retirement benefit that can help them achieve their long-term financial goals.

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The Advantages and Benefits of Association Retirement Plans

Association Retirement Plans (ARPs) offer several advantages and benefits for small businesses and their employees. Below are some of the key advantages and benefits of ARPs:

Access to Retirement Benefits

ARPs provide small businesses and their employees with access to retirement benefits that might otherwise be difficult or expensive to obtain. By pooling resources and sharing administrative costs, ARPs can provide retirement benefits that are competitive with those offered by larger employers.

Cost Savings

ARPs may be able to offer cost savings to participating employers by spreading administrative costs across multiple businesses. This can help small businesses offer retirement benefits without incurring significant costs.

Plan Design Flexibility

ARPs offer plan design flexibility, allowing participating employers to customize retirement plans that meet the specific needs of their employees. This includes selecting investment options, determining contribution levels, and establishing plan rules and regulations.

Investment Management

ARPs provide investment management services to ensure that employee contributions are invested in a diversified portfolio of securities that are appropriate for their retirement savings goals. This includes selecting and monitoring investment options and providing employees with information about investment performance and risk.

Recordkeeping and Administration

ARPs handle the administrative tasks associated with managing retirement plans, such as processing contributions, maintaining participant accounts, and providing regular statements and other communications to plan participants.

Compliance and Reporting

ARPs ensure that retirement plans are compliant with all applicable laws and regulations. This includes filing required reports with government agencies, conducting periodic audits, and making any necessary changes to the plan to remain compliant with regulatory updates or changes.

Education and Support

ARPs provide education and support services to plan participants to help them make informed decisions about their retirement savings. This includes providing access to financial planning resources, retirement calculators, and other tools that can help participants make informed investment decisions.

ARPs offer several advantages and benefits for small businesses and their employees, including access to retirement benefits, cost savings, plan design flexibility, investment management, recordkeeping and administration, compliance and reporting, and education and support. By working with a qualified ARP provider, small businesses can offer their employees a valuable retirement benefit that can help them achieve their long-term financial goals.

Last Trends

Emphasis on fiduciary responsibilities: In response to regulatory changes and increased scrutiny of fiduciary responsibilities, some ARP providers are offering additional support and education to plan sponsors to help them fulfill their obligations.

Greater customization: ARP providers are offering more customization options for plan sponsors, such as the ability to choose from multiple investment options and select plan features that meet their unique needs.

Understanding the Disadvantages and Limitations of Association Retirement Plans

While Association Retirement Plans (ARPs) offer many benefits, there are also some potential disadvantages and limitations that should be considered. Below are some of the key disadvantages and limitations of ARPs:

Limited Availability

ARPs are only available to small businesses and self-employed individuals, which means that larger businesses and their employees are not eligible to participate. This can limit the number of individuals who are able to access retirement benefits through ARPs.

Lack of Plan Sponsor Control

In an ARP, the plan sponsor (i.e. the employer) has limited control over the plan. This is because the plan is administered by a third-party provider, which may have its own rules and regulations governing the plan. This can make it more difficult for employers to tailor the plan to the specific needs of their employees.

Limited Investment Options

ARPs may offer limited investment options compared to other retirement plans. This is because the plan sponsor may be limited to a specific set of investment options offered by the third-party provider. This can limit the ability of plan participants to diversify their retirement investments.

Contribution Limits

ARPs are subject to the same contribution limits as other retirement plans. This means that plan participants may not be able to contribute as much to their retirement savings as they would like, particularly if they are older and have less time to save for retirement.

Administrative Costs

While ARPs can provide cost savings compared to other retirement plans, there are still administrative costs associated with managing the plan. These costs may be passed on to plan participants in the form of fees or other charges.

Regulatory Compliance

ARPs are subject to regulatory compliance requirements, which can be complex and time-consuming. This can create additional administrative burdens for plan sponsors and third-party providers.

ARPs offer several benefits for small businesses and their employees, but they also have some potential disadvantages and limitations that should be considered. These include limited availability, lack of plan sponsor control, limited investment options, contribution limits, administrative costs, and regulatory compliance. By carefully considering these factors, small businesses can determine whether an ARP is the right retirement plan option for their needs.

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How to Apply for Association Retirement Plans: A Step-by-Step Guide

If you are a small business owner or self-employed individual interested in offering an Association Retirement Plan (ARP) to your employees, here are the steps you need to follow:

Determine Eligibility

To be eligible for an ARP, you must be a member of an association that sponsors the plan. You will need to confirm your eligibility with the association and meet any additional eligibility criteria, such as having a minimum number of employees.

Select a Third-Party Provider

Once you have confirmed your eligibility, you will need to select a third-party provider to administer the plan. You can do this by researching providers online or asking for recommendations from other business owners or the association sponsoring the plan.

Choose Plan Options

Your third-party provider will offer a range of plan options, including contribution levels, investment options, and plan design features. You will need to select the options that best meet the needs of your business and employees.

Set Up the Plan

Your third-party provider will assist you in setting up the ARP, including registering the plan with the IRS and other regulatory agencies. You will need to provide information about your business and employees, including their names, addresses, and Social Security numbers.

Communicate with Employees

Once the plan is set up, you will need to communicate the details of the ARP to your employees. This may include providing information about contribution levels, investment options, and other plan features.

Monitor the Plan

As the plan sponsor, you will need to monitor the ARP to ensure that it remains compliant with all applicable laws and regulations. This may include reviewing investment performance, monitoring employee contributions, and making any necessary changes to the plan.

In conclusion, applying for an Association Retirement Plan involves confirming eligibility, selecting a third-party provider, choosing plan options, setting up the plan, communicating with employees, and monitoring the plan. By following these steps and working with a qualified provider, small business owners and self-employed individuals can offer their employees a valuable retirement benefit that can help them achieve their long-term financial goals.

Key takeaways on Association Retirement Plans
  • Association Retirement Plans (ARPs) are retirement plans designed for small businesses and self-employed individuals who are members of an association.
  • ARPs offer several advantages, including cost savings, simplified administration, and increased retirement savings opportunities for employees.
  • ARPs are administered by third-party providers, who handle plan setup, administration, and compliance.
  • To be eligible for an ARP, you must be a member of an association that sponsors the plan.
  • Some potential disadvantages and limitations of ARPs include limited availability, lack of plan sponsor control, limited investment options, contribution limits, administrative costs, and regulatory compliance.
  • To apply for an ARP, you must select a third-party provider, choose plan options, set up the plan, communicate with employees, and monitor the plan.
  • Overall, ARPs can be a valuable retirement savings option for small businesses and self-employed individuals who want to offer their employees a cost-effective and flexible retirement benefit.

 


FAQ

What types of retirement plans can be offered as ARPs?

ARPs can offer several types of retirement plans, including 401(k) plans, Simplified Employee Pension (SEP) plans, and Savings Incentive Match Plan for Employees (SIMPLE) plans.

What is the contribution limit for ARPs?

The contribution limit for ARPs depends on the type of retirement plan offered. For example, for 401(k) plans, the contribution limit for employees is $19,500 in 2021 (with an additional catch-up contribution of $6,500 for those age 50 and older).

How do ARPs differ from traditional retirement plans?

ARPs differ from traditional retirement plans in that they are designed specifically for small businesses and self-employed individuals who are members of an association. They offer cost savings, simplified administration, and increased flexibility in plan design.

Are ARPs subject to the same regulations as other retirement plans?

Yes, ARPs are subject to the same regulations as other retirement plans, including ERISA (the Employee Retirement Income Security Act) and IRS regulations.

Can I offer an ARP if I am not a member of an association?

No, to offer an ARP, you must be a member of an association that sponsors the plan.

What happens if the association sponsoring the ARP disbands?

If the association sponsoring the ARP disbands, the plan will need to be terminated or transferred to another sponsor or provider. The assets in the plan will remain the property of the participants, and any funds in the plan will be distributed according to the plan's terms.

by Olena Sobolieva

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