Ask a room full of small-business owners about the biggest challenges facing them today, and you will get a variety of answers. However, one common concern will undoubtedly be how to attract and retain quality employees due to the increased competition for talent.
As a result, today’s forward-thinking business owners are taking a much closer look at the benefit packages they offer their employees. One such benefit becoming very high in demand is a 401(k) plan for employees. Companies’ employees have a growing appreciation for the benefits offered through such plans, including pre-tax contributions, deferred taxation, investment options and employer matching. Today, employees are becoming more reliant on their own investing for retirement than upon employer-provided retirement plans. They are eager to direct their savings into these plans in order to gain control of their financial destiny. When corporations match employee contributions in full or in part, 401(k)s offer one of the fastest-growing, most tax-favorable investments available today.
A 401(k) is simply a profit-sharing plan that allows elective contributions from employees. Employees contribute to the plan by making pre-tax salary deferrals from their paychecks. The plan is popular with employees because it gives them an efficient tax-advantaged way to control their own retirement funds. Employers may also contribute on behalf of their employees by choosing to “match” an employee’s contribution. This is often done to encourage participation in the plan. The employer may also choose to make a pro-rata (or proportionate) contribution on behalf of all eligible employees.
It makes good business sense for small-business owners to offer their employees retirement plans because this policy assists in retaining long-term employees and attracting good prospects. The existing employees see more value because of the plan offered by their employer; the good prospects will often only consider companies that offer this as a standard retirement option.
Since a 401(k) plan provides an opportunity to tie productivity and profitability together in the form of profit-based matching contributions, such retirement plans also benefit a company’s financial performance. In addition, it’s an essential way to share responsibility for retirement planning with your employees. By doing so, the company’s employees become very aware of the financial health of the organization and express a vested interest in keeping it vital.
As a result of employees’ desire for more control over investment selection, many 401(k) plans have evolved from one plan to a variety of options from which workers may select. While it may provide increased benefits for the employee, this can be confusing and overwhelming. Rather than venture into unfamiliar waters, most small businesses decline to participate in the 401(k) altogether, thereby depriving them of a more secure future. One way to increase both employees’ and employers’ comfort levels is to offer pre-designed portfolios that range from conservative to aggressive. This enables employees to make personalized choices, but relieves them of the burden of constructing portfolios. Additionally, employers are offering initial and ongoing education for employees so they are able to make informed choices.
Just how important is it to a small business to provide a 401(k) plan for its employees? Very. No other type of savings plan can reduce an employee’s taxable income while increasing retirement savings. Today, national averages show that most people’s personal savings accounts only contain 30 percent to 35 percent of what they will need to comfortably retire. The rest of their nest egg must come from individual retirement planning in the form of pensions, 401(k)s, individual retirement accounts (IRAs), employee profit-sharing and other future-oriented savings vehicles.
A good 401(k) plan for employees makes sense for small businesses. Such retirement options give employees a very important benefit – peace of mind. After all, happy employees help build strong businesses. It just makes sense.