It seems that 401(k) plans have become the retirement plan of choice for many businesses. While they offer many advantages for the company and the employees, there are several issues that should be considered when evaluating them.

Why have a 401(k) or any other type of retirement plan?

• Offering a retirement plan as part of an employee benefit program helps three parties - the business, the owner, and the employees.
• The right type of retirement plan can become an integral part of the management of your business. It can help attract, retain, and motivate your employees. In an environment where keeping good employees is becoming more difficult, a good retirement plan, and effective communication about the plan, can be powerful tools.
• The right plan, properly structured, can also help the owner of the business build a substantial retirement nest egg.
• Employees are keenly aware of the need to take control of their future financial security. Providing assistance with a company sponsored retirement plan will help them reach their retirement goals.

What is a 401(k) plan?

A 401(k) plan is a company sponsored retirement plan that allows employees to defer a portion of their wages into investment options of their choice. Employers have the flexibility to make contributions and can also offer some form of matching contributions to their employees. The employer contribution flexibility and employee contribution aspects of 401(k) plans are part of the reason for its popularity among participants and why so many companies have chosen this form of retirement plan.

Why consider a 401(k) plan?

If your business has many employees, you wish to provide them with an attractive employee benefit, and you want to retain control over some aspects of a retirement plan, a 401(k) plan may be the most attractive alternative. This form of retirement plan can also allow for larger contributions than many other types of plans.

Key aspects of a 401(k) plan

• Any employer with one or more employees can establish a 401(k) plan. Usually, this type of plan is most economically feasible when the company has at least 25 employees.
• These plans allow for employees to contribute pre-tax dollars for their own benefit. It brings employees into the process of planning for their own retirement.
• Employer contributions are tax deductible.
• The contribution limits are larger than those found with most other types of plans. Employees can defer up to $23,000 for 2024 into their account. The total contribution, including employee and employer contributions, is limited to 25% of compensation, up to $69,000 for 2024.
• The Plans also allow a “catch-up” contribution provision for participants ages 50 and older. Under this provision, an eligible participant can contribute an additional $7,500 for 2024.
• Although employee contributions vest immediately, the employer can attach a vesting schedule to any company contributions. This provides a strong motivation for employees to remain with your company.
• The company can have some control over the level of their contributions. Usually, the plan document provides a certain level of contribution matching of employee deferrals, but it can also provide for discretionary contributions, usually based on company financial results.
• Most 401(k) plans provide a great deal of investment flexibility. Participants can choose where to invest their money among many options, usually including a number of mutual funds, and often company stock if the company is publicly held.
• There are annual filings that must be made with the IRS and special testing to ensure that the plan does not discriminate in favor of highly compensated employees.

Investigating 401(k) plans further

The key parties needed for establishing and administering a 401(k) plan are an administrator and an investment manager. Many investment managers offer special bundled programs that also include the administrative services needed for the plan, including IRS and Department of Labor filings.