A 401(k) is a type of qualified retirement plan created by employers, where an employee deposits money into a retirement fund and the employer matches a certain percentage of the employee's contributions. A 401(k) provides a payout at retirement that is reliant upon the total money contributed and the performance of the investment.
Most employers match employee contributions to 401(k) plans in order to attract and retain talent at their company. Most employees are very anxious about saving for retirement. Usually, if an employee has offers from different companies and all else are equal, 401(k) contribution matching could become a factor in choosing an employer.
Many employers prefer defined contribution plans instead of defined benefit plans because the former doesn't require them to decide where to invest and doesn't specify a certain amount of money to give when an employee retires. Defined contribution plans like 401(k) matching puts the onus of investing on the employee and doesn't guarantee a set payout at the end, which ultimately is more cost effective for the employer.
Charlotte Dougherty, CFP®
Dougherty & Associates, Cincinnati, OH
Employers offer benefit programs to help employees feel valued and build financial security for themselves and their families through tax-advantaged savings. While it is costly for the employer to manage, oversee, and test the plan, the overriding value of offering a 401(k) match is to earn the good will and loyalty of employees and provide a meaningful benefit.
Employees can grow their savings in a tax-deferred account and multiply their savings by way of the employer’s matched dollars, which are also tax-free at the time of contribution. If you have a 401(k) matching plan as a part of your employee benefit package, it is wise to make the most of it as it is an important tool for building net worth and financial independence for your retirement years.