A business owner and its management have a lot of considerations that they have to make when running their company. There is a real balance between cost and profit, and having an effectively run business often means making tough choices, potentially trimming important staff in financially lean times. However, personnel decisions go beyond hiring and firing people and also involve making sure that qualified employees are lured to the job and stick with it.
Why a 401k Plan?
When a job is posted and a potential employee is applying for a role, an interviewer needs to understand that the applicant is interviewing the company just as the company is interviewing the applicant. They are considering if they want to work at this specific company based on the manner in which they are being interviewed, the salary, and, of course, the benefits that the company is offering. One of the most critical benefits that an individual is looking at is the presence of a 401k plan as well as the details around the plan. Many job applicants simply won’t consider a job which does not offer a 401k plan to invest in.
Decades ago, most employers offered employees pensions in which they would receive some portion of their salary in retirement. Over time, these pension plans would become replaced with a 401k investment vehicle which allows employees to put funds away in a tax preferred manner. Generally speaking, the tax advantage for 401k plans is that they are not taxed now and therefore are able to grow with a higher gross amount over the employee’s working years. This can allow employees to fund their retirement in the absence of a pension plan, so long as they are diligent with putting aside funds regularly and consistently. While there are penalties associated with withdrawing funds earlier than retirement age, this has the benefit of preventing employees from looting their retirement funds.
Designing a Good 401k Plan
Over a long period of time, a 401k plan can be a great tool for retirement for an employer and also a great tool for attracting employees to join a company and stay with it. However, to qualify as a 401k plan with the associated tax benefits, an employer must offer a 401k plan with certain characteristics such as allowing immediate vesting on an employee’s contributions to the plan and making sure that the plan does not discriminate in favor of high end employees only. A qualified consultant can come in and make sure that the employer’s plan is effectively designed for the company.
For example, for a company that is concerned primarily with cost, not having an employer match of contributions may be a smart decision, even if having a plan means absorbing the administrative costs of the plan. However, for a company that is primarily concerned with employee retention, having cliff vesting of employer contributions after a 3 or 5 year period may lead to better retention of employees overall. Choosing the right investment funds can be a necessary step as well with a 401k plan.
This is where a great consultant can come in and pay off for a business with logical and cost effective choices. A great consultant can align the desires of the company with a quality 401k plan that rewards both employees and the employer.
