An Employer’s Guide to 401(k) Plans
Retirement isn’t just a distant dream — it’s a top workplace demand.
In a global WTW survey of 45,000 employees, retirement offerings landed in the top three most valued perks, right behind health coverage and flexible work. And these types of benefits aren’t just nice-to-haves anymore — they’re dealmakers. In North America, 57% of employees say their benefits package is the reason they’ve stuck with their employer, up from 48% in 2017.
Clearly, offering a 401(k) is a strategic advantage. So, let’s break down the details of these plans, how to know if they're right for your business, and three best practices for launching them.
Key Takeaways
- A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute pre-tax or post-tax income, with investments growing tax-deferred until retirement.
- These plans support recruitment, retention, and employee financial wellness — all while offering tax perks to employers.
- Educating employees is critical to plan success, from clear enrollment info to financial wellness tools and access to HR or retirement experts for ongoing support.
What is a 401(k) Retirement Plan?
A 401(k) retirement plan is an employer-sponsored savings plan that allows employees to contribute a portion of their pre-tax (or post-tax) earnings toward retirement. Contributions are typically deducted automatically from an employee’s paycheck and invested in various financial instruments like stocks, bonds, and mutual funds.
Employers may choose to match a portion of employee contributions, offering an added incentive for participation. The funds in an employer 401(k) grow tax-deferred, meaning employees don’t pay taxes on earnings until they withdraw the money in retirement.
What are the Different Types of 401(k) Plans?
Employers can offer different types of 401(k) plans, each with unique advantages. Some of the most common include:
- Traditional 401(k): Employees contribute pre-tax dollars, reducing their taxable income. Employers often provide matching contributions, subject to IRS contribution limits.
- Roth 401(k): Contributions are made with after-tax dollars, meaning they don’t reduce taxable income upfront. Qualified withdrawals (after age 59½) are tax-free, including investment gains.
- Safe Harbor 401(k): This kind of retirement plan is designed to avoid IRS nondiscrimination testing by ensuring automatic employer contributions. Employers must make either matching contributions (e.g., 100% of the first 3% of salary, plus 50% of the next 2%) or non-elective contributions (e.g., 3% of an employee’s salary, regardless of their contributions).
- SIMPLE 401(k) (Savings Incentive Match Plan for Employees): A streamlined plan for small businesses (with 100 or fewer employees) in which employers must make matching or non-elective contributions.
What are the Benefits of 401(k) Plans?
Offering a 401(k) plan delivers value on both sides of the table: helping employees build financial security and giving employers a competitive edge.
401(k) Benefits for Employees
- Tax advantages: With a traditional 401(k), for example, contributions are deducted from an employee’s paycheck before taxes are applied, which lowers their taxable income for the year.
- Matching contributions: Many employers offer matching contributions to retirement accounts, which is essentially free money that boosts an employee’s retirement savings. For example, if an employer matches 50% of an employee’s contributions up to 6% of their salary, an employee contributing $5,000 annually would receive an extra $2,500 from their employer.
- Consistent savings: More than half of full-time workers feel behind on their retirement savings. A 401(k) plan helps employees consistently save for the future.
- Growth potential: Unlike traditional savings accounts, 401(k) plans allow employees to invest in a mix of stocks, bonds, mutual funds, and index funds, which generally provide higher returns over the long run.
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Flexibility and portability: A 401(k) plan is not tied to a single employer, which means employees can roll over their savings when changing careers. Plus, while retirement savings should ideally remain untouched until retirement, some 401(k) plans allow loans or hardship withdrawals in case of financial emergencies.
401k Benefits for Employers
- Improved talent attraction: 73% of employees will likely be attracted to a company that cares about their financial well-being. 401(k) offerings are one way businesses can financially support employees and remain competitive in the talent market.
- Tax benefits: Employers who contribute to their employees’ 401(k) plans receive tax deductions for those contributions, reducing their taxable income.
- Enhanced employee productivity: 56% of financially stressed employees spend at least three hours per week dealing with or thinking about their financial issues. When employees feel financially secure — knowing they are actively saving for the future — they are less distracted and more engaged at work.
- Better retention: A strong retirement account offering — something 62% of employees seriously consider when taking a job — can encourage employees to stay. Implementing vesting schedules, which require employees to remain with the company for a set period before gaining full ownership of employer contributions, further reduces turnover and fosters a more stable workforce.
While matching is optional, some specific types of 401(k) plans — such as Safe Harbor 401(k) plans — require employers to contribute either through matching or non-elective contributions to ensure compliance with IRS non-discrimination rules.
How to Set Up a 401(k) Plan in 5 Steps
Setting up a plan may seem complex, but most of the administrative work is handled by a third-party provider. Companies just need to consider what they want to offer and how.
Step 1: Choose the Right Type of 401(k) Plan
Before setting up a plan, decide which type of 401(k) best suits your business needs by considering your:
- Primary goals: Are you hoping to attract top talent, offer competitive benefits, leverage tax advantages, or simplify compliance?
- Budget: Consider matching contributions, administrative costs, and third-party provider fees.
- Bandwidth: How much administrative responsibility can you handle? Some plans require ongoing compliance testing, while others (like Safe Harbor 401(k)s, designed for small businesses) minimize the burden.
Step 2: Select a 401(k) Provider
Most businesses partner with a 401(k) plan provider or third-party administrator (TPA) to manage investment options, handle IRS reporting, and ensure compliance. When evaluating providers, consider:
- Investment options and fees
- Ease of use for employers and employees
- Customer support and compliance services
- Integration with payroll and HR systems
- Ability to adapt and scale plans as your organization grows
Step 3: Determine Employer Contributions
Offering contributions boosts participation and retention while providing tax benefits for the business.
Based on your budget, your competition, and what employees want and need, decide whether you will:
- Offer matching contributions (e.g., 50% match up to 6% of salary)
- Make non-elective contributions (a percentage of salary for all eligible employees, regardless of their contributions)
- Provide discretionary contributions, adjusting year by year based on finances
Step 4: Establish Plan Rules & Eligibility Requirements
Once you’ve chosen a 401(k) plan, the next step is defining the rules and eligibility criteria that will govern how employees participate and receive benefits. This ensures fairness, compliance with IRS regulations, and alignment with your company’s goals.
Consider things like:
- Eligibility criteria: Will the plan be available only to full-time employees, or will part-time and seasonal workers also be eligible? Do employees need to work for a set period before joining the plan?
- Vesting schedule: Consider how long employees must stay with the company to keep employer contributions.
- Contribution limits: 401(k) plans must comply with IRS-imposed contribution limits, which are adjusted annually.
Step 5: Educate Employees & Roll Out the Plan
Simply offering a 401(k) plan isn’t enough — employers must actively ensure that employees are aware and taking full advantage of their available benefits.
Clear communication, accessible education, and ongoing support ensure that employees make informed decisions about their financial future.
To achieve this, be sure to offer:
- Clear enrollment details: Define when and how employees can enroll in the plan. Will employees be allowed to enroll immediately upon eligibility, or will there be designated enrollment periods (e.g., quarterly, annually)?
- Robust resources: 68% of employees report using financial wellness tools like webinars, workshops, and coaching. Employees should have access to clear, jargon-free resources that outline investment options, benefits, and key dates to avoid any analysis paralysis that may hinder enrollment.
- Access to HR support: Make it easy for employees to get answers to their retirement questions. Consider setting up HR-led office hours or a public “ask an expert” community group where employees can connect directly with retirement pros in a casual, low-pressure setting.
Top 3 Best Practices for A Offering 401(k) Plan
A well-managed 401(k) plan can boost employee participation, enhance retention, and simplify benefits administration. Here are some best practices that will help your organization do just that.
1. Streamline Where Possible
The easier it is for employees to take advantage of retirement options, the better. When creating and rolling out your plan. Be sure to:
- Offer automatic enrollment: Many employees hesitate to sign up due to inertia or lack of knowledge. Automation removes that barrier.
- Set up automatic notifications: Remind employees of critical information, helping them take full advantage of their coverage.
- Integrate administration: Alleviate administrative burden with an HCM provider that integrates with your TPA for smoother operations and compliance.
2. Put Employees in Control
Employees should be able to quickly and easily adjust their 401(k) contributions, select investment options, and track their progress — all on their own.
Give employees control by:
- Offering self-service tools: Allow employees to manage enrollments and check account balances from any device.
- Encouraging peer-to-peer knowledge sharing: Provide employees with a dedicated platform for sharing information and knowledge with one another, including company benefits.
3. Make Data-Driven Decisions
Whenever you’re making a decision about employee benefits, ensure you’re considering crucial insights like:
- Employee compensation history: Assess the total rewards for every employee, including their retirement plan offerings, for a more holistic view of how your organization supports employee financial wellness.
- Benefits engagement: Review data on plan participation to understand how your employees engage (or don’t engage) with your offering for better budgeting and plan design.
- Survey responses: Gather insights from employees directly after enrollment to determine whether needs are met, and adjust accordingly.
Take A Smarter Approach to 401(k) Management
A well-managed 401(k) plan is more than just a retirement benefit — it’s a strategic tool for attracting and retaining top talent and enhancing financial wellness for both employees and employers.
With Paylocity, organizations can make their 401k rollout and implementation:
- Efficient: Ensure accurate, automated payroll deductions and effortless plan administration with direct integrations to retirement plan providers and tools that help keep your 401(k) plan compliant with IRS and DOL regulations.
- Engaging: Use Community to share resources, answer employee questions, and boost your 401(k) plan participation.
- Empowering: Make it easy for employees to enroll, adjust contributions, and track their retirement savings with intuitive self-service tools. Plus, show employees the full value of their benefits with total rewards statements for a holistic view of their financial wellness.
Want to learn more? Request a demo of Paylocity today!
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