The Advantages and Disadvantages of Offering a 401(k) to Your Employees

The number of companies offering 401(k) plans to their employees has grown steadily for decades. In many cases, offering a 401(k) is essential to hiring the right people. A 401(k) is an employer-sponsored retirement plan to which employees can make contributions on a post-tax or pre-tax basis. Sponsors can make matching or non-elective contributions and can add a profit-sharing feature to the plan. There are advantages and disadvantages for the sponsor offering a 401(k) plan.

Advantages:

• A strong 401(k) plan will attract talent. Potential employees are looking for robust benefits packages, especially in today’s tight labor market. The 401(k) is one of the most desirable benefits an employer can offer.

• A good 401(k) can also help retain the talent a company already has. The plan’s vesting schedule, determines how much ownership the participant or employee has, at an given time, of the employer’s contributions into the plan. A vesting schedule can incentivize an employee to stay until they become fully vested. In addition, a generous benefits package will create good will with employees and make them less likely to take advantage of other opportunities with competitor employers.

• Plan sponsors benefit from tax deductions. Generally, employer contributions to the plan are deductible and reduce tax liability for the plan sponsor.

Disadvantages:

• With sponsoring a plan comes a cost. There are costs for record keeping, administration, investment management, and custodial services.

• Maintaining a plan can be legally complex. ERISA is the 1974 federal law that governs qualified retirement plans, including 401(k)s. The plans are regulated both by the Department of Labor and the IRS. The myriad of complicated rules and regulations can be burdensome, especially for smaller companies who are not experts in plan management, and in many cases, employers can be personally liable if they do not administer and manage the plan properly.

It is critical that plan sponsors hire competent expert help to avoid liability and focus on running their core business. With good administrators and investment managers, the potential pitfalls for employers of sponsoring a 401(k) plan can be overcome.

Have questions about 401(k) plans for your employees? Let us know how Generation Capital Management can help.