High-quality retirement benefits can be a game-changer for recruiting and retaining talent
In a market where top-tier talent has their pick of job opportunities, 401(k) plans are no longer just a benefit, rather an expected part of a corporation’s compensation package. The pluses for employees are obvious: providing a nearly effortless, tax-deferred method of generating substantial savings for their retirement years.
But many employers underestimate the many benefits 401(k) plans can extend to their business as well, from significant tax savings to helping retain valuable employees.
There’s no law requiring corporations to offer retirement plans—although the Employee Retirement Income Security Act (ERISA) strictly regulates them if you do. Nevertheless, nearly 80 percent of employers make 401(k)s available to their staff, and it’s rare to find a large corporation that doesn’t have them among their benefits. That number drops all the way to 53 percent, however, for small- to mid-sized companies, which often worry about the cost of sponsoring plans or feeling overwhelmed by fiduciary responsibilities.
Here’s the thing: recruiting and retaining superstar talent is more challenging than ever in the tightest labor market in decades, and companies that don’t offer competitive 401(k) benefits are at a significant disadvantage. Some employers are even going the extra step of implementing non-qualified executive benefits plans that enable them to selectively reward critical employees with additional, customized retirement benefits.
Some perks may dazzle staff in the short-term, but top candidates demand long-term rewards. Here are the biggest benefits employers can realize from ensuring their compensation package includes a strong 401(k) program:
6 advantages corporations enjoy from high-quality 401(k) plans
- The tax advantage. 401(k)s are qualified benefit plans, meaning they fall under the umbrella of ERISA and the Internal Revenue Code and qualify for tax benefits. Since Congress wants to encourage saving for retirement, corporations are incentivized to sponsor and contribute to 401(k) plans through two major tax breaks:
- Every dollar an organization contributes to its employees’ 401(k) plans is tax deductible (up to certain limits, of course), offering ongoing tax benefits to the business
- Assets in the plan grow tax-free
Smaller businesses may also qualify for a special tax credit for starting a qualified plan.
- Help employees retire on time. A potential crisis is looming in the U.S: many Americans approach retirement age without nearly enough savings to retire. More than half of American workers expect to work past age 65—and for 75 percent of them, financial reasons are a driving factor.An aging workforce can have a significant impact on a corporation, raising healthcare and payroll expenses and increasing turnover as younger workers with nowhere to advance look elsewhere for opportunities.401(k) programs with employer matches significantly improve a company’s ability to help their employees retire on time. Educating employees about the best way to meet their retirement goals not only helps employers meet their fiduciary responsibilities, but it also sets their workforce on the right path for saving enough for retirement.
- Increase employee morale and satisfaction. Keeping your workforce happy is essential to maximizing productivity and creating a loyal team. When employees feel like they’re working toward something—and that their employer genuinely values them—they feel engaged in their workplace and productivity increases. Strong 401(k) programs also help employees feel confident about their future, decreasing a common source of anxiety that lowers performance and contributes to health issues (and associated costs).
- Decrease turnover. Top-tier talent is heavily recruited, and a strong 401(k) program can be a compelling reason to turn down other offers, especially if your corporation offers a strong match program that employees would lose out on if they leave. In fact, more than 30 percent of employees say they value 401(k) plans more than pay raises—and 40 percent said they would leave their employer for a company that offers a 401(k) plan.Employees who feel their employer is invested in them are much less likely to seek greener pastures. That’s a key advantage when turnover costs can climb as high as 213 percent of annual salary to replace a highly educated executive position and 20 percent to replace mid-level positions. And that’s not including the invaluable skills, knowledge, and experience that’s lost when an important employee leaves.
- Attract the best new talent. At a time when people are questioning the longevity of Social Security, top-notch 401(k) plans can help your business stand out in a tough job market. More than half of employees say that an enticing retirement savings program tipped the balance in their decision to join their company. Offering a strong 401(k) plan can be a tie-breaker for candidates fielding multiple offers and signals a strong company culture centered around taking care of workers for the long-term.
- Invest in your own retirement. Executives also reap the benefits of 401(k) plans they set up for their employees. You can usually invest more through a business retirement plan than an IRA, especially if there is a company match.
4 characteristics of a strong 401(k) plan
Of course, not all 401(k) programs are created equal. And with so many different options to choose from, how do corporations ensure they’re offering the kind of high-quality plan that’s a game-changer for recruiting and retention? To stay competitive in the market, a plan should include:
- Immediate eligibility. Being able to immediately contribute to a retirement account is extremely compelling, because it enables employees to receive the full value of their benefit right away. It’s also likely to improve participation, since individuals are most likely to sign up during the onboarding process.
- A generous employer match. 401(k) matches are essentially tax-deferred compensation and many employees equate them to a salary bump or bonus. A generous employer match gives your company a competitive edge with job candidates who are considering several offers at similar salaries. The average matching contribution companies offer is 2.7 percent of the employee’s pay, which generally translates to 50 cents on the dollar. Nearly half of employers don’t offer any match at all, and 10 percent match a percentage of employee contributions at 6 percent or more of salary.
- Low fees. Ensuring that their 401(k) plan offers reasonable fees is an important fiduciary duty of employers. Companies have paid almost $400 million to settle class action lawsuits brought by employees about 401(k) fees since 2006, with the most recent high-profile case settling in March for $55 million. High fees eat into employees’ retirement savings; even a one percent difference can add up to hundreds of thousands of lost dollars over the life of the plan.
- Low cost investment options. Investments have varying cost structures based upon the “share class” used. The less an employee pays for the cost of an investment, the more they stand to earn. A 401(k) plan may provide a lower investment cost structure than purchasing investments outside of the plan.
Recruiting and retaining a talented workforce is key to a company’s success. And establishing a strong 401(k) benefit goes a long way toward ensuring that the team you put together remains loyal to your business—while safeguarding your bottom line with significant tax savings. A qualified investment advisor can help corporations assess their 401(k) plans to ensure that they’re offering maximum benefits to their employees, as well as to their business.
Lindberg & Ripple is an independent investment and insurance advisory firm providing sophisticated Wealth Management, experienced Investment Consulting, and innovative Insurance Solutions for wealthy families and business executives. Contact us to learn how we can help your family or business achieve your financial objectives, while minimizing hassle, expense, and taxes.