Companies in the United States have been dealing with an influx of employees seeking out better opportunities and retiring over the past year. Just between April and August 2021, around 20 million workers left their jobs as they contemplated their careers. In the last quarter of the year, around 50.3% of adult workers aged 55 and older have decided to retire. Due to this, openings are plentiful and companies are increasing their salary and benefit offers as they compete for talent and fill in their hiring gaps.
Employee retention becomes more important than ever and businesses are looking into more ways to engage their workers into staying. A recent survey by Glassdoor, shows that 89% of younger employees prefer to receive ample benefits over a heftier paycheck. And among the popular choices for most companies across all sizes is to provide a pension for their employees.
In the US, a 401(K) plan is among the benefits offered to workers. It is a retirement savings plan where employees choose an investment opportunity for the money they contribute to the program. Employers are then given the option to participate in the program as additional support for their workers.
What then is a 401k plan and matching? Do rules vary depending on company size? And how does this become an investment for employees in the long run?
The 401k plan is an employer-sponsored retirement savings plan where employees give a portion of their salary into an investment account. Contributions made to the plan will be placed in each of the employee's 401(k) accounts and will be invested and diversified in the stocks, bonds, or mutual funds that they have chosen. The investment choices will be set by the plan sponsor or the employer.
The maximum contribution that an employee can give in a year for this plan is $ 20,500.
These savings will be protected by the Employee Retirement Income Security Act of 1974. Additionally, it is considered a qualified retirement plan and is subject to tax benefits under the Internal Revenue Service (IRS).
The 401(k) Matching is not compulsory for employers and may be done later in the program. But an additional contribution will be a great way for employees to see how the company invests in its people. In fact, 51% of companies offering 401K provide matching for their employees.
Employers can offer to match dollar for dollar or 50 cents to a dollar, depending on the limit they set for their employees’ plans. For example, if an employee makes $50,000 a year and has allotted 6% of it for their 401(k), you can match their contribution for every dollar at $3,000 per year. In the same way, if you agreed to match 50 cents to a dollar, your matched amount will be $1,500 per year.
However, the amount that the employees will own upon the termination of their 401k will depend on the vesting schedule that the employers have set. The vesting period may be graded or cliff:
Graded vesting period: Entitles the employee to receive a gradual percentage of the matched amount depending on the years of service with the company,
Cliffed vesting period: Entitles the employee to receive the full amount after serving the required years of service with the company.
There are currently five different types of 401k plans for employees. Below are a summary of the rules governing each plan:
While 401(K) becomes a promising motivation for employees and appealing addition to the job postings to attract more talent, businesses must consider the best strategies to reap the benefits of this benefit. Below are some of the best practices and the types of 401(k) plan that is ideal whether you are operating for a small, medium, or large enterprise:
Small to mid-sized businesses, aiming to expand their operations and company size will benefit from offering 401(k) to their employees and business partners. But to better manage your organizations’ 401(k), the Department of Labor has given the following steps when establishing this retirement plan:
This documents a day-to-day plan for your business’ 401(K) plan. You may seek help from financial institutions or retirement plan professionals to draft a plan that best works for you.
Setting up a trust ensures that the plan’s assets will be allocated solely for this benefit. It must have at least one trustee to handle the contributions, investments, and distributions on the plan.
This will ensure smooth tracking of the assets within the plan.
This step empowers your employees to have a better grasp of their benefits and the procedures of the plan. Employers must provide a summary plan description (SPD) to the participants to guide them on how the plan operates.
The ideal type of plans to provide: Traditional 401(k), Safe Harbor 401(k), Solo 401(k) for sole proprietors, SIMPLE 401(k) for businesses with 100 and below employees.
Monitoring employee benefits in a large company becomes very tricky to monitor. While companies, nowadays, seek help from a PEO or an EOR, a better understanding on how 401(k) works will help you match contributions and hire the best talent in the country. While the steps as mentioned earlier for small and mid-size businesses apply to large businesses as well, below are additional steps large companies can take when handing their employees’ 401(k):
The easiest way to ensure that contributions are made for the plan is by setting up an automatic deduction for your employee’s wages towards their 401(k) accounts. In the same way, employers matching their employees’ contributions must also set an automated credit to their workers’ plan to avoid any mishaps.
Offering a 401(k) plan for your employees subjects your company to audits as a way to ensure that your business is following the regulations surrounding this employee benefit. Your HR should gain familiarity with the rules on matching and processing so they can keep a checklist of things that needs to be done for each employee. In this way, your business will be on top of things and won’t be dreading the audit notice when it reaches your office.
Most companies see 401(k) processing as an annual event but it shouldn’t be the case. Employers must review their employee plans, their employee demographic, and economic trends all year round. For example, offering 401(k) plans to a majority of young employees will be different from offering them to middle-aged workers. Companies must always rethink their strategies on offering investments to different age groups.
In the same way, they must also monitor economic activities to gauge their employees’ investing behavior. This will be vital when ensuring your employee’s retirement security and guide them on creating the best decision for their savings.
Before considering a 401(k) plan for each of your employees, businesses must consider a few pros and cons of this retirement plan.
401(k) plans are just one of the benefits that companies in the United States can offer their employees. Other benefits have their own set of rules and regulations that your HR department must manage on top of other administrative functions.
Multiplier is an all-in-one platform that can help your organization streamline HR functions, including setting up your payroll facility. Our global employment solution helps your businesses ensure that employees are paid on schedule and their contributions to the 401k are made on time.
Our team of experts is ready to help your company employ and retain the best talents, wherever they may be.
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Global Employee Benefits
Global Employee Benefits
Global Employee Benefits