A 401(k) plan is an employer-sponsored retirement savings plan that enables employees to contribute a portion of their paychecks to a tax-advantaged retirement account. Employees can make traditional 401(k) contributions with pretax dollars. Also, there is a Roth 401(k) option in which contributions are made with post-tax dollars where employees can make tax-free withdrawals in retirement. Either way, plan participants can invest their money in a range of investment options.
A 401(k) plan is a convenient and effective way for employees to save for the retirement they envision. How about for employers? Although you do not have to provide a 401(k), according to a recent survey from the Society for Human Resource Management (SHRM), 93% of organizations offer traditional retirement savings plans. Also, they provide many outstanding benefits for employers and employees.
Here are the major aspects and advantages of 401(k) plans that employers should know:
- Recruitment of talented employees. The 401(k) is a powerful tool: 67% of plan participants in a Betterment for Business survey said that a good 401(k) was very important or important in evaluating a job offer, and 46% said an employer match played a role in deciding to take a job.
- Retention of your staff. Competitive 401(k) plans with perks such as matching contributions encourage employees to stay with your company. An SHRM survey found that 74% of employers match employee contributions at some level. To make your 401(k) plan as competitive as possible, offer a plan with low fees, an employer match and a good selection of investments.
- Vesting schedule. Think strategically about your vesting schedule if you use matching contributions. You can elect to have a gradual vesting schedule to motivate employees to continue working with you. A short or even immediate vesting schedule can become a great selling tool when recruiting new staff.
- More focused staff. Personal financial stress negatively impacts employees’ performance, productivity and ability to focus. This can have a damaging impact on business output. By helping to alleviate employees’ financial stress, you will foster workers who are better able to concentrate on work. With your guidance on how to make the most of the plan, you can help reduce stress and help employees focus on what matters most.
- Valuable tax advantages. Some companies are eligible for special 401(k) tax breaks. If you have 100 or fewer employees and meet various other requirements, you could be eligible for a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a retirement plan. More details are available on the IRS site.
This is an introduction to a complex topic and there are several different kinds of 401(k) plans. We can offer guidance about the type of plans best for your employees and tax deductions associated with those plans. Contact us for details.