Pros and Cons of Offering a 401(k) Benefit For Employers

Hiring quality employees has become even more challenging in today’s competitive economic environment. Employers can build their workforce by offering incentives such as the 401(k) retirement savings plan.

There are multiple 401(k) benefits for employers and employees alike, which explains why the savings plan is one of the most popular employee benefits. However, there are some disadvantages for employers to consider as well. Here is an overview of the pros and cons of offering a 401(k) and some alternatives.

What is a 401(k)?

A 401(k) benefit is an employer-sponsored retirement investment plan in which employees can contribute pre-taxable income and, in many instances, receive a matching contribution from the company. Eligible employees can contribute up to $19,500 per year — and another $6,500 per year if over 50 years old. Employers can match any percentage of the employee’s contribution.

Pros

There are many 401k benefits for employers. The plans show an employer is willing to invest in its workforce, which can help recruitment and retention. The 401(k) is the most recognized retirement saving plan, and many job seekers gravitate toward companies that offer it. Employees are more likely to stay at a company that offers a 401(k), especially if the business has a vesting schedule.

Tax deductions are another significant advantage for employers, as companies that offer 401(k) plans to their employees can write off their matching contributions each year.

Cons

While the benefits are well-documented, there are also 401(k) disadvantages for employers. These include the amount of time and money associated with sponsoring the plan.

Plans can be cumbersome to set up and administer. There are also costs for outsourcing the record-keeping, investments, and administration. Plus, companies generally need to pay specialists to handle the program’s initial setup.

The other major disadvantage is the strict regulations. The IRS and the Department of Labor regulate 401(k) benefit plans. The rules and regulations set forth by the Employee Retirement Income Security Act can be complex, requiring annual compliance testing. Compliance can become a liability for businesses that don’t follow regulations.

Alternatives to the 401(k)

Despite the 401(k) benefits for employers, many companies choose to offer attractive alternative programs to employees. These plans can be especially beneficial for companies unable — or unwilling — to assume the risks associated with the 401(k) disadvantages.

Other options include IRAs (Individual Retirement Accounts) and SEP (Simplified Employer Pensions). These plans are well-suited for smaller companies with fewer than 100 employees.

IRA plans are similar to 401(k) in that they allow employers to offer matching contributions. They also provide more flexibility with the company contributions.

IRAs can be offered in three ways: the traditional, the Roth, and the simple.

The traditional IRA allows employees to contribute $6,000 annually or $7,000 if over 50. Individuals can immediately deduct their annual contributions when filing taxes with the traditional plan. They are only required to pay taxes when they withdraw the money.

The Roth IRA allows individual employees to contribute the same amount as the traditional plan but does not allow them to deduct contributions on their annual taxes. The benefit of a Roth is that employees can withdraw their money tax-free after reaching the age of 59 ½.

The third type is the Simple IRA, which allows the employee a much higher annual contribution allowance of up to $58,000 a year, or 25% of their compensation.

The other alternative employers have to offer are SEPs (Simplified Employer Pensions). Businesses of any size, including self-owned companies, can choose to provide SEPs.

SEP plans do not require start-up or operating costs, which can be an immediate benefit for the employer. The plans also offer flexible employer contributions and are easy to administer. With the SEP, employees can contribute up to 25% of their annual salary.

Employers need to offer competitive benefits packages to attract and keep quality employees in today’s job market. Retirement plans are one of the best incentives that companies can offer. The 401(k) benefits for employers are numerous. But if cost, cash flow, or flexibility are potential hang-ups, solid alternatives are available.