How an Employer Benefits from Offering a 401(k)
A 401(k) plan offers many valuable benefits to employees, but what’s in it for employers? The good news is that there are many compelling employer benefits, too.
Tax advantages. Investing opportunities. Matching contributions. As you know, a 401(k) plan offers many valuable benefits to employees. But what’s in it for employers? The good news is that there are many compelling employer benefits, too. Let’s start with defining exactly what a 401(k) is—and why it might be a great fit for your company.
What is a 401(k)?
A 401(k) plan is an employer-sponsored retirement savings plan that enables employees to contribute a portion of their paycheck to a tax-advantaged retirement account. In 2020, employees can contribute up to $19,500 to their 401(k), and if they’re age 50 or older, they can make additional catch-up contributions of up to $6,500. Unlike other plans—such as the SIMPLE IRA or Roth IRA—401(k) plans have higher contribution limits.
Under IRS guidelines, employees can make Traditional 401(k) contributions with pre-tax dollars. In addition, many employers offer the opportunity to make Roth 401(k) contributions with post-tax dollars—enabling employees to make tax-free withdrawals in retirement. Once they contribute to the plan, participants can invest their money in a range of investment options.
For employees, a 401(k) plan is a convenient and effective way to save for the retirement they envision. Want to learn more about 401(k) plans? Betterment can help.
Do you have to offer a 401(k)?
The simple answer is you don’t have to provide a 401(k). However, according to a recent survey from the Society for Human Resource Management (SHRM), 93% of organizations offer traditional retirement savings plans such as a 401(k). Why are these plans so common? Well, they feature many outstanding benefits for employers and employees alike. Here are the top five 401(k) benefits for employers:
Benefit #1: Attract and retain talented employees
When it comes to recruiting and retention, the 401(k) is a powerful tool. In fact, according to a Betterment for Business survey:
- 67% of plan participants said that a good 401(k) was very important or important in their evaluation of a job offer
- 46% of plan participants said offering an employer match played a role in deciding whether to take a job
In the battle for top talent, a competitive 401(k) plan with perks like matching contributions can entice employees to join (or stay with) your company. In fact, according to the recent SHRM survey, 74% of employers match employee contributions at some level. Not only that, but a company match costs less than you think.
Consider these three ways to use your 401(k) as a powerful recruiting tool:
- Demonstrate your commitment to current and prospective employees. By offering a 401(k) plan that has low fees, a competitive employer match, and a good selection of investments, you signal that you care about your employees’ futures.
- Think strategically about your vesting schedule if you decide to include company matching contributions. Some employers may elect to have a gradual vesting schedule as a motivator for employees to continue working at their company; however, immediate vesting may be a great selling point when recruiting new staff members.
- Communicate the benefits. You could have the best 401(k) plan, but if you aren’t communicating the benefits of participation, then you’re missing a vital opportunity. Whether you decide to send an email or host an event, be sure to get the word out about the value of your 401(k) plan.
Benefit #2: Help your employees build a brighter future
Saving for retirement is one of the most daunting financial goals employees face. In fact, many studies have shown that personal financial stress negatively impacts employees’ performance, productivity, and ability to focus. This can have a damaging impact on business output, and lead to higher employee turnover—and increase costs associated with hiring and retention.
By offering your employees a 401(k) plan—and the guidance they need to make the most of it—you can help reduce their financial stress and allow them to focus on what matters most.
Go beyond retirement
Buying a car. Saving for a house. Paying down debt. At Betterment, we know that saving for retirement is only one aspect of your employees’ financial lives. That’s why our easy-to-use online platform links employee savings accounts, outside investments, IRAs—even spousal/partner assets—to create a real-time snapshot of their finances, making it easy for them to see the big picture. By offering personalized advice, Betterment can help your employees make strides toward their long- and short-term financial goals.
Benefit #3: Enjoy valuable tax advantages
The government wants to encourage retirement savings—and as a result, the IRS grants some valuable tax benefits that can really add up over time:
1. A tax credit to help defray 401(k) start-up costs—You may be eligible if you can answer “yes” to the following questions:
- Do you have 100 or fewer employees?
- Did you pay each of them at least $5,000 last year?
- Was there at least one “non-highly compensated employee” who earned less than $120,000 last year?
If you meet these qualifications, you are likely eligible for a tax credit. Historically, the credit was 50% of your 401(k) plan start-up costs up to a maximum of $500 a year. However, with the recent passage of the SECURE Act, the limit is now the greater of:
- The lesser of $250 multiplied by the number of non-highly compensated employees eligible for participation or $5,000
Plus, you can claim this credit for the first three years of the plan. That means up to $15,000 in tax credits!
2. A tax credit for adding automatic enrollment to a new or existing plan—Thanks to the SECURE Act, small businesses can now earn an additional $500 tax credit for adding an automatic enrollment feature to their plan. The credit is available for each of the first three years the feature is active for a total of $1,500 in tax credits.
3. Tax deduction for employer matching or profit sharing contributions—Employer contributions are tax-deductible; however, we recommend you consult the IRS website or talk to a tax accountant for the rules governing these deductions. In addition, some of the fees for plan administration may be tax deductible.
If you think these benefits sound great, you may be asking yourself:
Can my company afford to offer a 401(k)?
As an employer, you know that providing quality employee benefits can be pricey. However, employers and employees typically share the cost of providing a 401(k) plan through a combination of asset-based and/or per-participant fees.
At Betterment, our fees are a fraction of the cost of most providers. Not only that, but we’re always up front and fully transparent about our pricing. That means no surprises for you and more money working harder for your employees.
Seize the benefits
Are you ready to dive deeper into the benefits of offering a 401(k) plan? Talk to Betterment today. As your full-service partner, we can help you with everything from enrolling new participants to managing the transition when employees retire. We handle all the details to help make life easier for you—and the future even brighter for your employees.