Understanding 401(k) & employee retirement plan benefits

“An average American, no matter their age, can still start planning and saving for retirement”.

These are the words of the renowned financial advisor, Dave Ramsey, well-known for his famous “rice and beans, beans and rice until you are debt free and on the right track for retirement”. He rightly framed the saving aspirations of the working class. 401(k) is a retirement saving plan that offers tax benefits to individuals.

The 401(k) plan is a robust investment vehicle for a happy and financially stable retirement. According to Empower, 70% of Americans contribute to a retirement plan like 401(k) and 403(b). However, the contribution varies by generation. Millennials and Gen Xers are at a neck-to-neck level with 75% and 76% contributions. But Gen Zers show less interest in retirement plan benefits with only 47% contributions to retirement plans. 

It may affect their saving speed as early and continuous investment comes with the power of compounding, yielding great returns in the future. Let’s understand what it is about 401(k) that makes it still so relevant. 

What is a 401(k) plan?

A 401(k) is a retirement saving plan for working individuals to set aside a certain percentage of their salaries in a separate retirement saving account. The retirement saving plan for employees is to build a corpus they can withdraw as a pension in their old age. 

A recent PwC survey highlights that 57% of employees feel that finances are the top cause of stress. 401(k) pension plans help them stress less about their present and plan their retirement. It is a defined contribution plan offered by employers. Also, the employee may get a match from an employer that can help build a large sum in their retirement plan.

Types of 401(k)s

According to Investopedia, individuals saved an average of 7.1% of their income in their respective 401(k)s. If that sounds amazing, you must learn more about the types of 401(k)s offered by employers. The IRS also refers to them as cash or deferred arrangements, or CODA.

Currently, there are two types of 401(k), giving investment options to employees: – 

• Traditional 401(k): The employee contribution is on a pre-tax basis, reducing the taxable income. Organizations can contribute to their employees’ 401(k) plans as a match to employee contributions or on their own.
• Safe harbor 401(k): It is 401(k) plan just like a traditional one. If the employer matches the requirements, they don’t need to perform the annual ADP or ACP nondiscrimination tests applicable to traditional 401(k) plans. 
• SIMPLE 401(k): Only for employers with 100 or fewer employees who received at least $5,000 in compensation for the prior year, SIMPLE 401(k) isn’t subject to the annual ADP and ACP nondiscrimination tests. 

What are the 401(k) contribution limits for employees?

Every year, the contribution limits for retirement plans are adjusted based on the cost of living. For 2024, the Internal Revenue Service announced that the contribution limit for retirement plans like 401 (k) plans has increased to $23,000. However, max out retirement contribution stands at less than 12% by Americans, which shows that the saving rate is not high.  

How can employers help employees manage their retirement plans?

With the rising cost of living, debt trap, low income level, and other factors, employee retirement saving plan often takes a back seat. To solve this looming retirement crisis, Americans are investing in increasing their financial literacy, building discipline, and segregating their “needs” and “wants” tab on the finance sheet. 

Many employers are helping employees manage their retirement assets. Most employees participating in 401(k), face challenges in managing their assets. This is where the HR team steps in with sources of financial education such as webinars, financial sessions, and investment tools to provide them with the right knowledge!

Also read: How to create a retirement benefit plan

Employer benefits of the 401(k) plan

While 401(k) plans are fruitful for employees in the long run, they are equally beneficial for employers. Let’s find out some key advantages of 401(k) plans for organizations: – 

Higher employee satisfaction

One of the biggest benefits of offering a 401 (k) pension plan is high employee engagement. It has a ripple effect in reduced turnover. Employees opting for a 401 (k) retirement plan have lower chances of leaving the organization. 401 (k) is one of the best investment options organizations can offer employees, especially if they match employee contributions. Quick vesting, immediate eligibility, and generous contribution make the compensation package more attractive. 

Meeting state mandate

Another benefit of offering 401 (k) is to adhere to state mandate. Some states like California, Oregon, and Illinois, have made enrollment in retirement plans mandatory for employers of certain sizes. So, it is a great opportunity to achieve the benchmark of the state requirements.

Who benefits from a retirement benefit plan?

Full-time employees of an organization benefit from a 401 (k) retirement plan. However, if part-time employees work more than 1000 hours a year, this plan is also given to them as per the Employee Retirement Income Security Act. 

Companies use some of the best HRIS software like Workable to manage payroll and retirement benefits of employees. The centralized system has all the employee information that can be accessed by authorized stakeholders. Existing employees can access their portals to know about their 401 (k) contribution. Also, former employees may contact the HR department with “find my 401 (k)” questions. A centralized system helps to streamline the process and extract information when needed.