Did you know the 401(k) plan was, for all intents and purposes, started by sheer accident?
In 1980, Ted Benna, a retirement benefits consultant from Philadelphia, Pennsylvania, came up with an idea for his banking client, which would utilize section 401(k) of the Revenue Act of 1978. That particular code, which had gone essentially unused, stated that employees could save pre-tax money into a retirement savings program. It also allowed for employers to make pre-tax contributions on behalf of their employees. It was not referred to as a “match” in the code, but Mr. Benna developed the idea of a matching contribution in order to encourage employees to utilize the plan.
Benna’s client actually rejected the idea, so he decided to implement the plan with his own company. In 1981, The Johnson Companies became the first to formally offer employees a 401(k) plan to save for their retirement years. According to the Employee Benefits Research Institute, within just a few short years, about half of all large companies were either offering the benefit or considering it. As a side note, the government tried to repeal section 401(k) twice when it realized the tremendous tax savings (loss of tax revenues for the government) that the code provided to American workers.
Today, a 401(k) plan is one of the most popular benefits offered to a large company’s employees. Unfortunately, according to an American Express survey, as many as 60 percent of smaller companies don’t provide this retirement platform to their employees. The reasons for not offering a 401(k) can be varied, but primarily include the misconceptions that plans are too expensive, too risky or too confusing to implement and monitor.
In today’s competitive work environment, your company is at a distinct disadvantage if you don’t offer a 401(k) plan. You aren’t required to offer a matching contribution for employees, although it is a very good idea to include this provision. The real benefit is the simple fact that you are offering your employees a way to defer income that would normally be taxable into an account that can help provide income later during their retirement years.
Offering a 401(k) plan can be an advantage for both the employee and the employer. By offering this critical benefit, you can not only attract more qualified candidates, but ultimately stand a better chance of retaining your most valued employees. When a retirement savings plan isn’t offered, employees must find alternative ways to save for their retirements. That could mean accepting an employment offer from a company that does provide such a benefit.
Here are just three of the many reasons you should be offering a 401(k):
- First and foremost, they are a good and sincere way to help your employees—who you count on day in and day out—to begin saving for their own retirements. In this day and age, with the lack of pension plans and a Social Security system that isn’t as financially strong as it was for previous generations, it’s never been more important for individuals to have the ability to set aside money for themselves. 401(k) plans offer one of the best platforms for employees to do just that.
More and more, employees are stating that retirement plans are one of the most sought-after benefits they look for when considering employment possibilities. Providing a quality retirement plan will not only encourage employees to save for their retirements, but can instill in them a loyalty to your company while keeping them interested in helping your business grow and succeed. - 401(k) plans have become less complicated to implement and maintain. A lot has changed in the decades since Mr. Benna’s company created that first 401(k) plan. These days, it doesn’t require that your company have a full-fledged human resources department, because you can simply outsource the responsibilities of administering the plan and educating your employees to a financial services company and a professional advisor. In addition, much of the tedious administrative work has been drastically lessened by technology. Technology has also considerably reduced the costs associated with offering your employees this valuable benefit. But you still have to perform due diligence and make sure the provider you select is charging fees and expenses that are reasonable.
- The tax savings for both the employee and the employer are significant. Employees contribute money from their paychecks on a pre-tax basis. Taxation, therefore, occurs only on the amount of pay after their contributions have been removed, reducing their overall current tax liability. In addition, all those contributions and investment earnings over the years grow completely tax-deferred until the funds are withdrawn as income during retirement. As a side note, don’t forget that small business owners are employees as well and can potentially take full advantage of this retirement savings vehicle.
For the employer, the tax savings can potentially be two-fold. First, your company may be entitled to tax credits in the first three years of your business. Tax savings of up to $500 per year in each of those initial years could be important in offsetting some startup costs. Second, no matter how long you’ve been in business, if you decide to supercharge your 401(k) plan by offering competitive matching contributions to employees, the business can deduct those contributions from annual taxable income.
In today’s competitive business world, offering your employees an easy way to save for their retirements is crucial—not only to your employees’ retirement savings, but to your company’s success as well. It can be a deciding factor as potential employees consider their employment options. Don’t put your company at a disadvantage by not including a 401(k) in your benefits package. Offering a strong and competitive 401(k) plan doesn’t have to be difficult. You owe it to yourself and your employees to make sure you’re giving them a platform to save for a healthy and wealthy retirement. iBi
Information provided is general and educational in nature and should not be construed as legal or tax advice. Securities and Advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC.
