How does an employer benefit from a 401(k) matching plan?
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)s put 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.
The benefits are mostly intangible, and somewhat financial. The main benefit is the employee benefit. The employer offers a matching contribution to try to boost morale and increase the chances of attracting great employees. It is hard for someone who's never owned a business to understand, but finding talented, loyal, honest and hardworking employees is the single biggest challenge for any business. There's a reason that businesses have entire departments that exist just to manage the employee workforce. The matching contribution is used as a way to get a talented person to choose that employer's job offer over another's. Another benefit is that the business owner can get more money into their own retirement account, as well as those of the employees. Lastly, it helps that the matching contributions are tax-deductible to the business.
The main benefit to an employer from a 401(k) matching plan is the increased likelihood of retaining employees. It's a matter of giving more to the employees in hope of raising the probability that they will remain with the company. The alternative is reduced benefits and increased employee turnover. Since the matching contribution is not required, the employer has flexibility to cut back if circumstances so require. In addition, these contributions are tax-deductible for the employer.
Employers benefit in 4 primary ways:
- It allows them to attract new talent by offering employer matching contributions to a prospective employee’s retirement.
- It gives them a tax deduction for the contributions they make.
- Providing the plan remains in compliance with all required testing, it allows owners and other highly paid employees the opportunity to also defer funds for retirement.
- In some cases, matching contributions are not immediately vested, meaning the company gives them to you, but they don’t completely belong to you until you satisfy some period of time under continuous employment. Vesting schedules can encourage any employees who were considering a job change to reconsider or delay leaving, given the benefits they might be leaving on the table.
An employer gets a tax deduction for matching contributions. It also helps to promote goodwill toward the employees so they remain, thus reducing their turnover. This is especially true if they have a vesting schedule where the employee must work for a certain time period, usually around 3 years before they vest in the matches made.
Hope this helps, Happy Holidays, Dan Stewart CFA®
The biggest advantage of a 401(k), 403(b), or 457 retirement plan for any employer is that it shifts the burden of managing retirement assets from an employer to an employee. Employers love this since otherwise they face serious legal obligations to provide pensions for their workers. This way, the employees can make terrible investment choices and the employer has zero liability (or almost zero--it is really a bit more complicated). With a traditional pension, an employer has to constantly monitor the pool of money being managed and is repeatedly subject to audit or other legal entanglements.
With a 401(k), all an employer has to do is throw in matching money for those employees who choose to participate--and nothing for those who don't. That's why these became so popular since they were introduced in 1981. Each year there are fewer traditional pensions and more retirement plans, and that trend will continue.