When looking for a job, people often focus on finding a job that pays the most salary. Unless the difference in pay is significant, more income does not always determine the best job offer. There are even some salaries without benefits offered to job hunters. But when choosing between a job with benefits versus high pay, it is essential to consider the entire package: salary, medical and dental benefits, insurance coverage, and especially retirement plans under which an employee would be covered.
- When choosing the right job, there are trade-offs between higher take-home pay and more significant fringe benefits.
- Higher pay means improved cash flows and buying power for immediate purchases or investments.
- Greater benefits, which may be challenging to put an exact dollar amount on, often provide a security net for a health event or during retirement.
- Employer benefits differ significantly in terms of scope and generosity. Be careful to understand the pros and cons of each option.
If it comes down to a job with benefits versus a job with no benefits, it is usually best to take the job with benefits, which millions of American workers have chosen. According to the Kaiser Family Foundation's 2020 Employer Health Benefits Survey, employer-sponsored insurance covers approximately 157 million people. The cost? In 2020, the average annual premiums for employer-sponsored health insurance were $7,470 for single coverage and $21,342 for family coverage, according to the Kaiser Family Foundation's 2020 Employer Health Benefits Survey. So, the more of the premium a potential employer will pay, the better.
The retirement plan program is an integral part of your compensation package and could determine the lifestyle you can afford during your retirement years. Below are some choices you may face.
Higher Salary vs. Retirement Plan
An employer that does not offer a retirement plan might not be worth considering unless the salary being offered is such that it will allow you to comfortably add contributions to your nest egg on your own. These contributions should be comparable to those provided by other companies with a retirement plan.
If your employer offers a 401(k) plan, the IRS allows you to contribute up to $19,500 of your salary per year tax-free as of 2021. Besides the benefit of your retirement account being funded with pretax dollars, some employers offer matching contributions, matching the amount the employee contributes up to a certain percentage. Any matching contributions, profit-sharing contributions, and the income tax you would save through salary deferral should be considered when comparing job offers.
Defined-Contribution vs. Defined-Benefit Plan
If potential employer A offers a 401(k) plan and potential employer B offers a defined-benefit program, employer B is often the better choice. With a defined-benefit plan, your plan benefits are not affected by market performance. Instead, investment risks are borne by your employer, and unless your employer files for bankruptcy and is unable to fund the plan, your pension is guaranteed.
Some may argue that, by nature, defined-benefit plans are risky given the probability of the employer being unable to fund the plan. However, these plans are protected by the Pension Benefit Guaranty Corporation (PBGC). While your benefits may be reduced, you are guaranteed to receive a minimum percentage of your promised benefits. With a 401(k) plan, you accept responsibility for the investment risks and potential losses due to market fluctuations.
Choosing Between Two Defined-Contribution Plans
If you are trying to choose between two employers that offer defined-contribution plans, look for the following features:
Money-purchase pension plans and target-benefit plans include guaranteed contribution features. As such, the employer is mandated to contribute to the plan each year for as long as the plan is maintained or subject to stiff penalties.
Profit-sharing plans often include discretionary contribution features, which means the employer is not required to fund the plan each year. This makes the money-purchase and target-benefit plans more attractive than a profit-sharing plan. There are exceptions to this general rule, as an employer does have the option to include a mandatory contribution feature in its profit-sharing.
Salary Deferral and Matching Contributions
If both plans include a salary deferral feature, check to see if there is a cap on the amount that can be deferred other than the statutory limit. For instance, the employer may limit deferrals to 10% of compensation. If that is what you will be deferring anyway, it is not an issue, but if you would like to wait more than that amount, the plan may be too restrictive for your retirement needs. Check for matching contributions as well to see which plan offers the higher matching contribution amount.
For employees, lower out-of-pocket expenses mean more disposable funds, and these can be added to your retirement nest egg.
Qualified Plan vs. an IRA-Based Plan
Qualified plans usually include distribution-restriction features that may force you to leave the funds untouched until you retire or change employers. This can be a good feature because it prevents the removal of funds from the nest egg for non-necessities. IRA-based plans, such as SEP IRAs and SIMPLE IRAs, have no distribution restrictions, which means that withdrawals from the fund are allowed. Other features, such as contribution limits and creditor protection, should be considered if you need to choose between the two potential plans.
Suppose you are weighing two employers, and neither one offers a retirement program. In that case, you can consider looking elsewhere or determine whether the compensation package will allow you to fund your retirement accounts, such as traditional IRAs, Roth IRAs, tax-deferred annuities, and other savings programs.
Cafeteria Plan Benefits
Choosing the employer with the better cafeteria plan benefits may mean fewer out-of-pocket expenses for medical and dental needs, as well as better insurance protection for your dependents. A cafeteria plan is an employee benefit plan that allows staff to choose from various pretax benefits. It is also referred to as a "flexible benefit plan" or Section 125 plan.
Cafeteria plans include benefits such as:
- Flexible spending accounts (FSAs), which can pay for a number of medical or dependent care expenses on a pre-tax basis
- Medical and dental benefits
- Assistance for dependent care and adoption
- Health savings accounts (HSAs), which allow employees to pay for medical expenses on a pre-tax basis
- Term life insurance coverage
The Bottom Line
Bear in mind that your total employment compensation is not limited to your salary. Consideration must be given to the benefits an employer offers.
If you want to get a good understanding of a potential employer's benefits package, ask for a copy of its summary plan description (SPD). SPDs are usually provided to current or former employees and beneficiaries; however, if this employer has a good package and you are an impressive candidate, the employer may be willing to make an exception on your behalf.