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Guide to Employer-Sponsored Retirement Plans (Without the Jargon)
February 19, 2025
Today’s top talent isn’t just looking for a paycheck — they’re looking for long-term financial security. That’s why a solid retirement plan has shifted from a nice-to-have to a must-have for employers who want to stay competitive.
Whether you're a startup building your benefits from the ground up or an established company looking to level up your offerings, understanding employer-sponsored retirement plans is essential.
In this guide, we’ll break down your options, from traditional 401(k)s to more tailored solutions, so you can choose the right plan to attract, retain, and support your employees’ financial futures.
Key Takeaways
- An employer-sponsored retirement plan is a benefit program that allows employees to save and invest (through payroll deductions) for their retirement, often with the help of their employer (through matching or profit-sharing contributions).
- Employers should choose retirement plans based on workforce demographics, business size, and strategic talent retention goals.
- It’s not enough to set it and forget it — organizations must offer comprehensive employee education and user-friendly enrollment programs to increase participation.
What is an Employer-Sponsored Retirement Plan?
An employer-sponsored retirement plan is a program established by an employer to help employees save for their post-working years.
Employer-sponsored plans often offer tax advantages, employer contributions, and automated savings features that help employees build retirement wealth over time. Some employers set vesting schedules, requiring employees to remain with the company for a certain period before they can claim full ownership of their employer’s contributions.
Benefits of Offering a Retirement Plan
Employer-sponsored retirement plans are a win-win for both organizations and employees. From tax advantages to financial security, here’s how everyone can benefit:
For Employers
- Attract and retain talent: A strong retirement plan makes your company more appealing to job seekers and can incentivize current employees to stay.
- Tax deductions: Many employer contributions are tax-deductible, reducing business tax liability.
- Lower payroll taxes: Employee contributions to tax-deferred plans reduce taxable income, potentially lowering payroll taxes.
- Boosts Employee Productivity: Financially secure employees are less stressed and more focused on their work.
- SECURE Act 2.0 Incentives: Small businesses can get tax credits for starting a new plan.
For Employees
- Tax-advantaged savings: Contributions grow tax-deferred (traditional 401(k), IRA) or tax-free (Roth accounts).
- Employer matching: Many employers match a portion of employee contributions, boosting retirement savings.
- Automatic savings: Deductions from each paycheck make it easy to save consistently.
- Compounded growth: Contributions and employer matches grow over time, maximizing long-term savings.
- Financial security in retirement: A well-funded retirement plan helps employees avoid financial struggles later in life.
- Portability: Employees can roll over funds if they switch jobs, keeping their savings intact.
Most Common Employer-Sponsored Retirement Plans
When it comes to retirement plans, organizations have many options. Here are some of the most common:
|
401(k) Plans |
Employees contribute a portion of earnings toward retirement savings, often with employer matching. Contributions are pre-tax (unless Roth). Higher annual contribution limits than IRAs, with options for loans and hardship withdrawals. |
|
403(b) Plans |
Designed for employees of nonprofits, public schools, and religious organizations. Offers similar tax advantages and contribution limits as 401(k) plans. |
|
457(b) Plans |
Available to state and local government employees and certain nonprofits. Similar to 401(k), offering pre-tax contributions, flexible withdrawal rules, and high contribution limits. |
|
SIMPLE IRA |
Uses pre-tax contributions, lowering taxable income. Employers must contribute—either matching up to 3% of salary or making a flat 2% contribution for all eligible employees. |
|
SEP IRA |
Designed for small businesses and self-employed individuals. Only employers can contribute, offering significant tax benefits and flexibility. |
|
Cash Balance Plans |
Functions like a pension but with an individual account balance. Can be paid as a lump sum or converted into an annuity upon retirement. |
|
Employee Stock Ownership Plans (ESOPs) |
Employees gain company ownership through stock contributions from the employer. Employees build wealth by holding and eventually selling shares, typically upon retirement or departure. |
Deciding on Retirement Offerings
A 401(k) might be the most popular option, but that doesn’t mean it’s automatically the right fit. To choose the best retirement plan, you must clearly understand your business and your employees.
Think about your workforce, business size, budget, and long-term goals. These factors will help you find a plan that benefits your team while making financial sense for your organization.
1. Your Workforce
Employees' demographics and financial situations should be large factors in deciding retirement plan offerings.
- Workforce age: Not all employees are interested in the same retirement benefits. Younger employees, for example, may prioritize portability and flexibility (e.g., 401(k) with Roth options). Older employees, though, might value predictable income (e.g., pensions or cash balance plans).
- Income levels: High earners may seek plans with high contribution limits like 401(k)s or SEP IRAs, while lower-income workers may prefer immediate employer contributions or matching. Take a deep dive into compensation across your workforce to understand your employees’ income levels.
- Financial literacy: Employees familiar with investing might prefer diverse investment options, while others may benefit from plans offering guided or default investment strategies (e.g., target-date funds).
Use employee survey tools to capture opinions on retirement benefits to understand your workforce’s wants and needs.
2. Your Business Size and Budget
The size of your business and your workforce affects which plans are most practical. Small businesses with fewer than 1,200 employees might be more interested in SIMPLE IRAs, for example, as they typically have low administrative costs and are simple to maintain.
Medium to large organizations, however, might be more interested in 401(k) plans — often the most popular retirement option because of their flexibility and scalability.
Your organization's budget is another important factor, considering that many retirement funds operate based on employer contributions. You’ll need to consider how much your business can afford to contribute and manage ongoing costs.
3. Your Business Goals
Your retirement plan choice should align with your organization’s strategic objectives. When considering your retirement plan, factor in goals like:
- Employee retention and recruitment: Plans with employer contributions or vesting schedules can enhance long-term loyalty, while a competitive 401(k) plan might be more strategic in initial recruitment efforts. Employees continue to cite their employers' retirement benefits as an important reason they remain with their current employer or leave.
- Financial health: Consider the potential tax advantages for both your company and employees. Qualified deferred compensation plans offer tax deductions on contributions, which can reduce your business’s taxable income.
How to Implement Your Retirement Plan
Getting your retirement plan set up involves a hefty amount of administrative work. But that’s just the start of it. Implementing a plan successfully — and getting employees to enroll and be satisfied with their benefits — takes strategy, too.
1. Get Set Up
Work with a financial institution, retirement plan provider, or consultant to establish the retirement plan for employees. This involves completing the necessary paperwork, setting contribution rates, determining eligibility, and making required filings with the IRS or relevant authorities. The forms and processes vary depending on the type of plan you’d like to offer.
Check that your HRIS can integrate with your retirement plan administrators for easier contribution management.
2. Communicate
Employees are less likely to participate in retirement plans if they aren't informed and educated about their benefits. Consider the following:
- Host information sessions: Conduct periodic webinars or in-person meetings where employees can ask questions of HR or benefits representatives in real time.
- Educate during onboarding: Include a walkthrough of the benefits during orientation or onboarding so new employees are immediately aware of their retirement savings plan options.
- “Broadcast" communications: Use a system to streamline announcements into a single location accessible to all employees. These announcements might be periodic updates and reminders, especially during key milestones like vesting periods or stock option exercises, so employees are continuously informed and can make well-timed decisions.
3. Facilitate (or Automate) Enrollment
Many organizations are facing a retirement gap, says Managing Director of Strategic Retirement Partners Jeannie Sutton — meaning that employees of lower socioeconomic statuses and minorities are contributing less to retirement plans.
One of the best ways to close this gap, she says, is through automatic enrollment.
“We know participation rates spike if you're automatically enrolled than if you have actually to go enroll yourself,” Sutton said. “It's the law of inertia.”
Try using tools like automated benefits workflows in your HR software to process new-hire benefits and collect necessary life event documentation.
4. Monitor and Evaluate Plan Performance
Regularly review your retirement plan to ensure it continues to meet the needs of both employees and the organization. To do this, be sure to:
- Survey employees: Gather feedback to understand satisfaction and identify areas for improvement.
- Assess participation rates: Monitor enrollment and contribution trends to gauge engagement.
- Automate reporting: Use built-in analytics to generate compliance reports and track plan performance.
4. Ensure Compliance
Retirement plans are subject to strict regulations, so staying compliant is critical.
Compliance includes maintaining proper documentation, following fiduciary responsibilities, and adhering to contribution limits. Employers offering 401(k) plans must also pass nondiscrimination tests to ensure the plan benefits all employees fairly.
To simplify compliance, organizations should regularly review their plan, update policies based on regulatory changes, and consider working with a third-party administrator or financial advisor.
You should also invest in a payroll system with retirement plan integrations for more seamless deductions and plan management.
5. Promote Ongoing Financial Wellness and Empowerment
Offering ongoing support and education is another essential piece to ensuring employees' enrollment and financial health.
Sutton, the managing director of Strategic Retirement Partners, emphasizes financial wellness resources as an important part of creating a supportive employee experience.
“When you think about employee experience, it used to be we just talked about mental health, and we used Employee Assistance Programs (EAPs) as a way to check that box and say, ‘yes, we are good employers!’” Sutton said. “But that’s not enough anymore. We need to be thinking about holistic employee health, and that includes financial health.”
To do this, consider offering ongoing webinars, downloadable guides, and the opportunity to speak with an expert on retirement options. And give employees self-service tools so they can enroll, update contributions, and monitor their savings on their own.
Handle All of Your Retirement Offerings with Paylocity
Organizations can offer their employees many retirement options, but finding the right one, implementing it, and ensuring its success requires a lot of work.
With Paylocity, organizations can handle all of their retirement benefits in one place:
- Manage: Paylocity's retirement provider integrations allow organizations to easily manage retirement plans for both employers and employees, simplifying administration and ensuring a smooth process.
- Streamline: Automating benefits workflows streamlines new hires' onboarding, life event documentation collection, and employee self-service for elections and enrollments.
- Assess: Paylocity’s compensation tool allows employers to create total reward statements that incorporate retirement plan offerings, giving employees a clearer, more complete picture of their compensation. Our reporting tools also offer insights into enrollment status, contributions, and plan elections.
Ready to get started? Request a demo today.
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