A 401(k) is one of the most common retirement investment options offered by employers in the United States today. It’s not surprising why. These plans provide both employers and employees with a flexible way to save money for retirement, and they have been around for almost 40 years.
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Payroll deduction
Portability
Recruitment & Retention
Tax deductions
Incentivizing performance
Payroll deduction
Risk Factors
Americans are 15 times more likely to save for retirement if they have access to a payroll deduction savings plan like a 401(k) at their job. This finding is hardly surprising when you consider the convenience of payroll deduction.
Solution
401 K is an good option. Employee contributions are deducted from each participant’s pay check automatically based on their salary deferral election which is usually based on a % of compensation.
Portability
Risk Factors
The employee is always worried about the benefits while changing his job / employer.
Solution
When a worker leaves their employer, they are usually entitled to a distribution of their 401(k) account immediately. They can roll this distribution to a new employer’s 401(k) plan or a personal IRA.
Recruitment & Retention
Risk Factors
Retirement benefits are becoming increasingly important to employees. A recent study found that two-thirds (68%) of workers said a retirement plan was a critical factor in deciding whether or not to accept a job, while 62% said a plan was a critical factor in staying with a job.
Solution
This plan can be a great benefit. A 401(k) plan can be a powerful tool for employers to attract and retain employee talent.
Tax deductions
Risk Factors
Businesses are always concerned about the amount of tax they are supposed to pay.
Solution
All businesses can claim a tax credit deduction for paying 401(k) plan-related expenses, including Employer contributions & administration fees.
Incentivizing performance
Risk Factors
A profit sharing contribution can be allocated among 401(k) plan participants using dramatically different formulas
Solution
This allows an employer to allocate multiple contribution rates to different employee groups – or even a different rate to each employee. Most often, employers use this flexibility to allocate larger contribution rates to business owners or other Highly Compensated Employees (HCEs) but it can also be used to reward employees for high performance.
What is a 401 (k) and how does it work?
A 401(k) is an investment plan that allows employees to contribute a percentage of their salary to a designated retirement account. Contributions to the 401(k) are invested in a portfolio made up of mutual funds, stocks, bonds, money market funds, savings accounts, and other investment options. These deferred contributions are usually taxable only when the employee makes a withdrawal: typically at retirement. 401(k) plans offer a good way for employees to save money for their futures, and for both employers and employees to save on taxes.
401 (k) benefits
One of the primary reasons companies offer 401(k) plans is to attract and retain top talent at every level of the organization. A 401(k) is attractive to employees because it provides an easy, cost-effective way to plan for retirement by making tax-deferred contributions to an investment fund. But employees aren’t the only ones who receive tax benefits from a 401(k) plan—employers can also deduct contributions made to employees’ 401(k) accounts.
Benefits of contributing to a 401(k) include:
Saving money for retirement.
Tax savings due to contributing pre-tax dollars. Read the following guide for more details:
Is a 401(k) Match Contribution Tax Deductible?
Tax-free growth throughout the investment’s life.
Access to multiple investment options.
How much does 401 (k) cost?
While you cover the hard dollar costs like set-up and administration fees, you’ll also want to consider the fees your employees are charged. This directly impacts how attractive they find the plan and, ultimately, their participation. Moreover, as an employer, you have a fiduciary responsibility to make sure the fees employees pay are reasonable and validated – or you can face fines for breaching your fiduciary duty.
A 401(k) is a sought-after benefit by workers, ranked one of the top five benefits for employee satisfaction. By offering one, you’ll improve your ability to attract new talent and show employees you value them and care about their financial futures. This, in turn, can encourage employees to stay with you over the long-term, setting up your business for future success. Contact us today to know more.
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