Trade unions, including government workers, are among the only employees left who can receive retirement pensions from their employers. For nearly everyone else, the best retirement options are tax-advantaged retirement savings plans such as 401(k) and IRA (Individual Retirement Arrangement) accounts.
In some ways, this makes the jobs of CFOs and HR professionals easier. Employees now make choices about how their retirement money is invested, and after the funds are fully vested, they are out of the company’s hands so there is no need to set aside pension money for future pensions.
The rise of 401(k) and IRA plans also comes with some challenges, and they revolve around the investment choices you make available if your company offers employees one of these tax-advantaged plans. First among them, perhaps, has to do with the volatility of the stock market. If your choice of 401(k) management firm is not doing its job well, your employees could lose tens of thousands of dollars in a market downturn.
Second, you have to choose as a company whether to contribute to your employees’ plans. This matter is often part of compensation discussions, but realize that the most companies that set up 401(k) options do contribute a small percentage. Even if you don’t want to contribute, however, your employees could benefit from a company-sponsored retirement investment plan because they would be able to save money without paying income taxes on those funds upfront. Their only other way to get tax benefits from retirement savings is to open an IRA, in which the tax benefits are granted during retirement instead of at the time the income is earned.
Four Kinds Of 401(K) are Available to Employers:
- Traditional 401(k)s, which allow you to set aside company-contributed money until employees have been with the company for a certain amount of time. These also require the company to test annually to ensure the plans don’t benefit highly paid employees at the expense of others.
- SIMPLE 401(k)s, for companies with up to 100 employees, which lack some protections but don’t have the annual testing requirements.
- Safe Harbor 401(k)s, which do not allow employers to set aside contributed funds based on employees’ length of service.
- Roth 401(k)s, which allow employer contributions but that tax the original wages instead of applying taxes only after retirement.
If you don’t have in-house expertise on these financial matters, you can either hire a part-time or project-based CFO or accountant, who can guide you through the process and help you find a finance management broker to oversee the investments.
Your employees give up significant portions of their lives to work for your company, and if they work hard, you probably agree that they deserve a comfortable retirement. Furthermore, the better benefits you offer, the higher-quality employees you will be able to recruit. Make sure your choices about employee retirement are beneficial to your company now and in the future.