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How Employer-Matching 401(k) Contributions Can Boost Employees' Retirement Savings

Employee Benefits

Offering a 401(k) match for a percentage of your employees' contributions can go a long way toward easing their worries about a secure retirement. A 401(k) match demonstrates a company's commitment to helping its workers reach their retirement goals, greatly increasing the value of their savings.

And there's no time like the present to offer this benefit. Our nation faces a retirement crisis as baby boomers (born 1946-1964) come to the end of their careers. Consider a few findings from the 2018 Northwestern Mutual Planning & Progress Study:

  • One in five Americans (21 percent) lack retirement savings entirely;
  • One in three baby boomers (33 percent) has only $0-$25,000 in retirement savings;
  • 24 percent of Americans believe it's "not at all likely" or only "somewhat likely" (51 percent) that Social Security will be available when they retire; and
  • Nearly half (46 percent) of adults have not prepared for the likelihood they could outlive their savings.

With pension plans becoming less common and Social Security predicted to drain its cash reserves by 2034, employer-sponsored retirement plans such as 401(k) arrangements hold the key to confidence for workers lucky enough to have them.

A benefit that attracts top talent

In today's tight job market, an employer-sponsored retirement plan is a hiring incentive. Even more valued is a company match for employees' contributions. Prospective job candidates pay significant attention to compensation, which doesn't stop with salary and bonus potential. Benefits compose a key part of a company's total compensation package. If your business has trouble attracting or retaining top staff, a retirement plan could be the answer to closing your company's talent gap. Moreover, retaining good workers saves you money on training and attrition costs associated with turnover.

A 401(k) retirement plan allows employees to make pre-tax contributions to their accounts, lowering their taxable income. They only pay taxes on contributions when they withdraw funds in retirement, unless they contribute to a Roth 401(k).

How does a 401(k) match work?

When an employer chooses to boost workers' 401(k) contributions, it can do so by matching a percentage of employee contributions up to a set portion of total salary; or contributing up to a certain dollar amount, regardless of employee salary.

Companies can match up to 6 percent of worker set-asides annually; the average company subsidy is 2.7 percent of pay.

Employers offering 401(k) plans can usually take a tax deduction for contributions to the plan when the contributions are made. The IRS highlights two tax advantages of sponsoring a 401(k) plan:

  • 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.

And don't forget: Business owners can invest in the company 401(k) plan, too. Both you and your employees can feel more confident in preparing for your nonworking years.

Make it easy for employees to invest

In addition to matching a percentage of employee 401(k) contributions, a company can facilitate workforce participation in the plan by:

  • Providing employees with retirement planning materials so they understand their options — and what's at stake if they don't save. Consider inviting speakers on financial planning for brown-bag lunches or other events.
  • Shortening or eliminating the waiting period for new staffers to join the 401(k) plan.
  • Using automatic enrollment to remove the decision to participate. Odds are, your employees will continue with the plan. You're doing them a favor (and a service) by providing a means for their financial future. Of course, employees can opt out at any time.
  • 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.
  • Making available a resource to answer staffers' questions about the company retirement plan and retirement saving in general.

The more information and support you offer while employees build their financial future, the more participation you'll see.

Vesting protects retirement plan contributions

If matching employee 401(k) plan contributions works for your firm, consider vesting to help protect that venture. Vesting is the practice of delaying an employee's ownership of the company match (or any other company contribution, like profit-sharing) until a set period of time. This discourages staff members from leaving the company before the date when they receive access to the funds from the company match.

To learn more about 401(k) plan to your firm and your workers, read:

Need help with setting up a 401(k) plan, determining matching funds, or administering this valuable benefit? Consider working with a leading expert and ensure access to unbiased, quality retirement solutions, paired with exceptional service to ensure plans run smoothly.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.