It’s readily apparent that the employee benefits landscape has changed dramatically over the past two years. Because of the pandemic’s effect on how and where employees are working and the impact of The Great Resignation, American workers are expressing a great er interest in non-traditional benefits like remote work and flexible hours than ever before.
However, traditional employee benefits are still high on most employees’ wish lists of workplace benefits. According to ADP, nearly 80% of employees view benefits like a 401(k)-retirement plan as a key consideration in accepting a new position. Companies that recognize the importance of helping their workers establish long-term financial security have a distinct hiring advantage.
Interestingly, most companies currently offering retirement plans are large employers. 98% of companies employing 5,000 or more workers provide this benefit, compared to just 1/3rd of companies with 20 or fewer employees. This puts smaller businesses at a distinct disadvantage in the battle to attract skilled workers in today’s ultra-competitive recruiting environment.
What makes the 401(k) plan such a valuable benefit for both employers and employees? If you’re an employee of a company offering this benefit, read on and see why participating in your company’s plan is crucial to having a healthy financial future.
If you’re an employer who isn’t yet offering your employees a 401(k) as a benefit, see why providing a retirement plan is one of the smartest moves you can make to ensure sustainable long-term growth for your company.
How Employees Benefit from 401(k) Participation
There are few things you can do during your working years that are more important than putting aside a percentage of your pay into a retirement plan. Undoubtedly, there will come a time when you’ll want or need to stop working; participating in your company’s 401(k) plan today provides you with the opportunity to save for your future financial needs conveniently and affordably.
Let’s look at how you benefit by taking advantage of your company’s 401(k):
Reduces your taxes: your contributions to the plan are made on a “pre-tax basis,” meaning the amount you contribute from each paycheck reduces your taxable income. Uncle Sam actively encourages you to participate by providing you with a tax break that will add thousands of dollars to your account over time.
In addition, the growth of your money in a 401(k) is tax-deferred, meaning dividends or capital gains earned as your investments grow won’t be taxed until you begin making withdrawals. This can be of significant benefit if you’re in a lower tax bracket when you retire.
Employer matching contributions: if your company offers a matching contribution, you’re receiving “free money.” The amount they add to your account doesn’t affect how much you can contribute annually, and your employer’s contribution also grows tax deferred.
Convenient payroll deduction: many people find the best way to set
money aside for retirement is to automatically have a percentage of each paycheck deposited into a 401(k) plan. This helps you follow one of the fundamental rules of financial planning - “pay yourself first,” ensuring you’ll have money available when you retire.
Employer Benefits of Offering a 401(k) Plan
Not only do 401(k) plans help employees prepare for retirement, but they also offer significant employer benefits, including:
Attracting and retaining employees: If you’re an employer, you’re aware of the tremendous cost of recruiting and training new employees. Employee turnover can be one of your highest costs of doing business.
A study conducted by Accenture in 2019 found that over two-thirds of workers (68%) said a retirement plan was a critical factor when deciding whether or not to accept an offer, while 62% said having a retirement plan was a major reason for staying with their company.
The money you save by not having to spend hours recruiting and training replacements of employees who have left the company in pursuit of richer benefits will more than offset any startup and administrative costs associated with your plan (which are minimal).
Tax deductions: safe harbor, matching, and/or profit-sharing contributions you make on your employees' behalf are tax deductible. This deduction is limited to 25% of the total earned by employees participating in the plan, which poses a problem for very few employers.
A way to fund your retirement: company owners and executives are also employees, meaning you can contribute up to $20,500 into your 401(k) account in 2022. If you’re age 50 or older, you can also make additional “catch up” contributions up to $6,500 this year.
Companies can also make elective contributions regardless of the amount an employee contributes. The general limit on total employer and employee contributions in 2022 is $61,000, or 100% of the employee’s compensation.
How Having an Investment Advisor Benefits 401(k) Participants and Companies
The value of a 401(k) plan for employees and employers depends not only on offering a variety of investment choices for participants, but also on achieving an acceptable rate of return for employees contributing to the plan.
Numerous studies have shown that Investment Advisors increase investment returns for employees by 2% to 3% per year. They help plan participants identify investment options that align with their long-term goals. And every bit as important as assisting with investment selection - they help employees stick to their long-term plan when the market goes through its natural ups and downs.
By advising and encouraging participants to “stay the course” during times of increased market volatility that can be unnerving, an employee’s total cost basis for a stock or mutual fund will ultimately be lower because they’ll have the confidence to continue to buy shares, even when the price drops. This allows them to purchase more shares per payroll deduction, which increases their profits from the long-term gains of their investment.
Most small businesses also prefer the “personal touch” provided b y a financial advisor. Companies that make assistance in investment selection available to their employees experience greater participation and satisfaction with the plan, which directly impacts retention.
Many people working for small businesses want to work with an advisor but don’t have access to this resource that many large employers provide. Companies that use the services of an Investment Advisor to set up their plan and counsel their people are doing more than simply adding an employee benefit – they’re adding value to the lives of their people.
Justin Wollman
Portfolio Manager
Intent Investment Management
415-717-2661