What is a Simplified Employee Pension (SEP)?

A Simplified Employee Pension (SEP) is an employer-funded retirement plan that allows employees to manage their own accounts. This type of plan is particularly advantageous for small business owners and self-employed individuals because it provides a straightforward way to contribute to retirement savings while benefiting from tax advantages.

Employers can make deductible contributions to the SEP, which are then placed into individual retirement accounts (IRAs) for each eligible employee. Employees have the ability to manage their own accounts, making investment choices that align with their individual financial goals. This flexibility in account management is a key feature of SEPs, distinguishing it from other retirement plans that may have more restrictive investment options or management structures.

In the context of the other options, the mention of high fees and complex management in the second choice does not apply to SEPs, as they are generally designed to be simpler and more cost-effective than traditional pension plans. The third choice incorrectly suggests that employee contributions are the sole form of funding, while SEPs are primarily employer-funded. Lastly, the idea of a mandatory retirement plan with employer contributions, as indicated in the fourth option, does not accurately represent a SEP, which is voluntary and involves a convenient contribution structure without mandatory employee participation.