Employer Benefits of 401(k) Plans
Though a 401(k) plan continues to be a desired employee benefit, some employers are still hesitant to adopt one. A 2020 J.P. Morgan survey found that just under half of businesses with less than 50 employees offer a retirement savings plan, 63 percent of which said they had no plans to do so in the future.
The perception of cost is often among the most significant factors that impedes business owners from establishing a 401(k) or other retirement plan. But the reality is that offering a retirement plan is not as expensive as one may think. What's more, aside from helping employees save for retirement, which in and of itself is a considerable employer benefit of 401(k) plans, employers can take advantage of many other benefits as well.
Benefits of offering 401(k) plans for employers
Understanding the true benefits of 401(k) plans for both employers and employees can help you uncover the advantages of taking this step in offering a plan.
Watch this video with Gene Marks, CPA, author, and small business expert, as he explains a few of the employer advantages of having a retirement plan.
How do companies benefit from 401(k) plans?
401(k) tax benefits
The Internal Revenue Service (IRS) highlights two tax advantages of a 401(k) plan sponsored by employers:
- Employers can deduct contributions on the company's federal income tax return to the extent that the contributions don't exceed certain limitations.
- Elective deferrals and investment gains are not currently taxed and enjoy tax deferral until distribution.
- Additionally, retirement plan benefits like a 401(k) can be more affordable with a business tax credit. This credit of up to $5000 each year for the first three plan years can be applied to plan startup expenses.
Staying competitive for top talent
The pursuit of hiring great employees often comes down to what you can offer by way of compensation and benefits. Particularly when vying for quality talent with industry competitors, a 401(k) plan — and even better, offering a company match — can help your business stand out if candidates are weighing job offers.
Employee satisfaction and retention
Offering retirement plans can help in employers' efforts to engage employees and reduce turnover. Employees who are making an investment in their future through retirement plans may be less likely to move on to other companies — in particular, when employers make matching contributions or provide additional value it adds to an employee's total compensation. Determine whether your retirement plans and other benefits enhance total compensation packages, or whether adding additional benefits to your current offerings could increase employee retention.
Meeting state mandates
Some states, such as California, Illinois, and Oregon, have rolled out their own retirement savings programs, requiring employers of certain sizes to enroll in a retirement program through the state or establish a qualified plan of their own. Some cities such as New York City are following suit. Employers can take this as an opportunity to not only meet their state's requirements, but also help bridge the gap toward their employees' non-working years who may not otherwise have access to a retirement plan.
401(k) benefits for employees
Want to ensure employees take advantage of the retirement plans you offer? Here are some benefits of 401(k)s for employees:
401(k) plans provide tax-advantaged retirement-saving
With a 401(k), employees can save pre-tax dollars while they are working. By the time the savings are needed to fund their retirement, it's anticipated that they will be in a lower tax bracket, which can generate long-term tax savings.
Matching employer contributions are one of the top benefits of employee 401(k) plans for employees. Employers have the option to match a percentage of employee contributions up to a set portion of total salary, or contribute up to a certain dollar amount, regardless of employee salary.
How do 401(k) employer contributions work?
401(k) employer contributions, otherwise known as an employer match, are a percentage of an employee's salary that's typically a dollar-for-dollar match from the employer up to a certain amount.
Company A matches 100 percent of contributions up to 5 percent of employee salaries
Mike earns $1,000 per week and contributes 5 percent of salary
$50 per week is deducted from Mike's paycheck
Company A matching contribution is $50 per week
401(k) principal balance grows by $100 per week
While employers aren't required to offer a contribution, they can choose to contribute as much or as little as they like, within federal limits. Employers can match up to 100 percent of the savings added by employees, which incentivizes plan participants to contribute more, since they'll receive more from the match by doing so. Employers can also choose to make a contribution to their employees by utilizing a profit-sharing plan. This contribution can be made in addition to an employer match, or on its own at the discretion of the employer.
What is the average employer 401(k) match? When deciding how much to contribute to a 401(k), remember that it will likely cost you more money to lose an employee than it will to match 401(k) contributions. Common 401(k) matches are 50 to 100 percent of employee contributions up to a set percentage of their salary, such as 6 percent. A May 2019 report from Fidelity found that employers contributed an average of 4.7 percent of employees' salaries to their 401(k)s in the first quarter of 2019, which was a record high. In comparison to match dollars, think about the costs associated with recruiting, interviewing, and training new employees. The higher the turnover rate, the more time and money you could lose.
Communicating 401(k) plan benefits to potential employees and educating current ones
With a high-quality retirement plan in place, the next step is a major commitment to marketing this benefit wherever your recruitment efforts take place. Communication steps can include:
- Encouraging your employees to spread the word about this great retirement plan throughout their personal and professional social media networks.
- Preparing written and online materials outlining the key features and advantages of the plan. Provide the written materials to interested applicants at tradeshows and job fairs, as well as during individual job interviews.
- Creating a special "save for your future" page on your careers website, with all the relevant facts and statistics you can provide for a broader picture. Including an easy-to-read FAQs page allows job candidates and other site visitors to quickly research the plan.
- Provide examples of the long-term financial benefits of saving through a 401(k). The money that goes into a 401(k) plan is taken from a participant's paycheck before taxes. Doing so effectively lowers take-home pay, which in turn decreases the taxes paid. It's important to note that while the money put into a 401(k) can accrue for years, withdrawals are taxed when they are taken out during retirement. Let employees calculate their individual savings by using a retirement calculator.
- Leverage technology for plan features. Many employees expect nearly everything to be available online these days, so use application software for retirement plan administration to your advantage. That way, user-friendly accessibility will encourage employees to become more familiar with their plan options.
Don't stop at an initial communication. Regular updates on plan benefits and enhancements, as well as annual contribution changes can keep employees engaged and help them manage their retirement accounts. Keeping employees apprised of their financial gains by providing monthly updates that show how much has been saved and how the funds grow month-over-month. Also, be sure to have someone available to answer questions about the plan and retirement-saving in general.
Retirement savings for small business owners: contributing to your own 401(k)
Just as workers should plan for their future, so should business owners. However, many don't.
According to 2019 research from SCORE, 34 percent of small-business owners said they did not have retirement savings plans for themselves, and 40 percent of business owners said they were not confident that they would be able to retire before the age of 65.
There's also the notion that small-businesses owners don't want to retire, and therefore don't need to save because they will always work. But circumstances outside of their control, like illness, may make a situation without a savings or exit plan challenging. Consider the financial toll of the COVID-19 pandemic on many Americans. A solid retirement savings plan can help you weather any storm that comes up.
No matter the size of your company, establishing a 401(k) plan as part of a comprehensive benefits package can be a win-win for you and your employees. If it's time for your company to evaluate your current benefits and possibly update your offerings, conducting a benefits audit may be a logical next step.