Higher Pay vs. Better Benefits: An Overview
When looking for a job, people often focus on finding a job that pays the most. But, unless the difference in pay is significant, more pay does not always determine the best job offer. When choosing between offers, it is important to consider the entire package: salary, medical and dental benefits, insurance coverage, and especially retirement plans under which an employee would be covered.
- When it comes to choosing the right job, there are tradeoffs between higher take-home pay and greater fringe benefits.
- Higher pay means improved cash flows and buying power for immediate purchases or investments.
- Greater benefits, which may be difficult to put an exact dollar amount on, often provide a security net in case of a health event or during retirement.
- Employer benefits differ greatly in terms of scope and generosity. Be careful to understand the pros and cons of each option.
According to a July 2017 release by the Bureau of Labor Statistics (BLS), 70% of civilian workers surveyed had access to retirement and healthcare benefits from their employers. In terms of healthcare benefits, those employers paid 80% of the cost of premiums for single coverage and 68% of the cost of family coverage for their employees. Those premiums amounted to an average of $6,690 per year for a single person and $18,764 a year for family coverage, according to the Kaiser Family Foundation's 2017 Employer Health Benefits Survey. So, the more of the premium a potential employer will pay, the better. Smaller companies can combine their costs with a MEWA option.
The retirement plan program is an important 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 offered by other companies with a retirement plan.
If your employer offers a 401(k) plan, the IRS allows you to contribute up to $19,000 of your salary per year tax-free as of 2019. In addition to 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 that you would save through salary deferral should be taken into consideration 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 plan, 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), and 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:
- Guaranteed Contributions: Money-purchase pension plans and target-benefit plans include guaranteed contribution features. As such, the employer is mandated to make contributions to the plan each year for as long as the plan is maintained or be 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 defer 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.
- Choosing Between a Qualified Plan and 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.
If you are weighing two employers and neither one offers a retirement program, you can consider looking elsewhere or determine whether the compensation package will allow you to fund your own retirement accounts, such as traditional IRAs, Roth IRAs, tax-deferred annuities and other savings programs.
(For more on choosing retirement plans, see Which Retirement Plan Is Best?)
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 a variety of 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
For employees, lower out-of-pocket expenses mean more disposable funds, and these can be added to your retirement nest egg.
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.