5 Benefits of a 401(k) for Employers and Employees
Offering a 401(k) plan offers employers a powerful tool to attract talent as well as potential tax benefits. For employees, participating in a retirement program offers significant immediate tax savings and long-term financial benefits.
The benefits of a 401(k) are significant to employers and employees alike. A 401(k) plan is a program that allows employees to defer a percentage of their compensation up to annual limits set by the IRS. These funds are tax-deductible and designed to help people save for retirement.
Employers may be reluctant to take on the administrative challenges of offering a 401(k) plan. However, the right partner can take the pain out of administering a plan and helping educate employees on the benefits. Here's a deeper dive into the benefits of a 401(k) for organizations and their employees.
Reasons employers should offer 401(k) plans
1. Attract and retain employees
Potential employees are looking for many things when considering a new job. Aspects like a competitive salary, acceptable health care coverage and a retirement plan have become critically important in their decision-making process. In fact, according to the Bureau of Labor Statistics, 77% of workers with access to a retirement plan participate, making it a critical benefit.
Today's workers are relying on the companies they work for to provide access to retirement benefits. A well-designed retirement plan can make a business's workforce stronger by attracting and retaining motivated, productive workers with financial benefits they value.
2. Assist employees in saving for retirement
Today's employees are struggling to make ends meet, let alone save for retirement. The American Psychological Association 2023 Stress in America survey finds that money is a top source of significant stress for workers. Many employees are financially overwhelmed, living from paycheck to paycheck with little retirement savings and struggling to cope with rising costs.
Employees need a retirement plan that will help them save well for the future and feel confident in their decisions. Companies that choose to offer a retirement plan can have a big impact on their employees' futures.
3. Potential tax saving advantages of a 401(k) plan
As a business owner, retirement plans enable you to receive a possible tax credit of up to $5,000 for startup administrative costs each of the first three years of the plan.1 There are also potential tax deductions for offering an employer-matching contribution. Participants who make pre-tax 401(k) deferrals lower their taxable income and may be eligible for a tax credit.
4. 401(k) plans are easy to set up and maintain
Today, retirement plans are typically designed to be easy to set up, administer and maintain. Many retirement plan providers offer an automated process for handling complicated and time-consuming plan administration tasks, helping to reduce the risk of errors.
For example, according to an ADP study, with comprehensive plan automation, businesses can save time and money on plan administration and reduce fiduciary risk and compliance errors. Today's 401(k) plans often allow employees access to their accounts online 24 hours a day, seven days a week.
5. A financial wellness program can help increase employee productivity
The first step toward financial wellness for employees is offering a solid and affordable retirement plan. Financially stressed employees are less productive at work and can cost their employer productivity and money.
According to a recent survey by PwC, 57% of employees report finances are a top source of stress, and 44% of employees stressed about money report being distracted at work by financial issues. The benefits of a 401(k) include reducing stress by helping employees prepare for the future.
Reasons workers should sign up for 401(k) plans
1. Contributions are made pre-tax
Employees can lower their yearly taxes by saving for retirement. Contributions to a traditional 401(k) program are considered pre-tax funds because they're taken out before taxes are calculated. This means money contributed to a 401(k) reduces contributors' total taxable income.
In 2024, a single filer with a salary of $60,000 who contributes $13,000 to her 401(k) would reduce her taxable income to $47,000 and lower her income tax rate from 22 percent to 12 percent, according to the Tax Foundation. The money continues to grow tax-free until it's withdrawn after retirement, when the employee may have a lower effective tax rate.
2. 401(k) plans are sheltered from creditors
A 401(k) may be one of the most secure places to invest money. Funds that employees contribute to 401(k) plans can be protected if they're experiencing financial strife. Under the Employee Retirement Income Security Act (ERISA) of 1974, most employer-provided retirement plans such as 401(k)s are exempt from creditors.
This is true whether employees owe significant debts to financial institutions or have filed for bankruptcy unless the creditor is the IRS. Additionally, some 401(k) plans offer the ability to borrow funds in the form of a loan. While this should be a financial last resort, it can provide additional financial flexibility during troubled times.
3. Contributions are automatically deducted
Saving for retirement can be difficult and is often deemed important but not urgent. With a 401(k), employees can have their contributions automatically deducted from their payroll. Research from Pew shows that employees are 15 times more likely to save for retirement if they can contribute via payroll contributions.
The most significant factor in successfully saving for retirement is making regular contributions and consistently investing over time. This strategy yields greater and more consistent returns than a single win from successfully trading stock at a profit.
4. Investments are tax-deferred
401(k) retirement contributions are made with pre-tax money, effectively reducing an employee's income and tax liability in the year the contribution was made. In addition, it's important to note that money in a 401(k) is also allowed to grow without being taxed until the funds are withdrawn.
As a result, compounded interest helps maximize the returns on the funds invested. Franklin Templeton notes that it takes just 12 years for a tax-deferred account with a $100,000 investment to double, compared to 19 years for an after-tax account.
5. Contribution limits are higher
Whether they're playing catchup or just trying to save the maximum each year for retirement, a 401(k) offers employees the ability to save more money than other retirement accounts. While the contribution limit to an IRA will be $7,000 in 2024, individuals eager to grow their retirement savings can contribute up to $23,000 into 401(k) plans. Check the latest limits from the IRS.
The benefit of offering employees some security
By offering a 401(k) plan, organizations can help workers take the first step towards getting retirement ready and preparing for the future. When employees are secure about their financial well-being, they will be less stressed and more productive.
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1 Consult your tax or legal advisor to determine if you are eligible for this federal tax credit.
