Why You Should Have An Employer-Sponsored Retirement Plan

Employees expect employer-sponsored retirement plans to be a part of a company’s benefit package offerings. According to Glassdoor, it’s one of the most desired employee benefits alongside health insurance, paid time off, bonuses, and flexibility. 

But employer-sponsored retirement plans have become essential over the last twenty years. For one, people are living longer. In some cases, employees will have to account for 30 years worth of retirement savings. And social security only covers so much. According to 2021 reports from the Social Security Administration, the monthly benefit paid by social security is just under $1,400 a month. If you live in Denver, you know that’s not even enough to cover rent. 

As a result, employees are more concerned about their financial situation than ever before — and they should be. According to a survey done last year by PwC, financial matters cause the most stress among employees, and 38% of workers report that they have less than a thousand dollars in savings to deal with emergency expenses. On top of everything, financial literacy is lacking — many people don’t even know where to begin. 

Luckily, there are more incentives and advantages to employer-sponsored retirement plans that help address these concerns. 

Advantages of Retirement Plans for the Employee and Employer

Employer-sponsored retirement plans help fill the financial knowledge gap and offer workers a means to improve their financial wellness. Specifically, contribution matching and automatic payroll deductions make it easier for employees to save. 

What employers need to know is that financial stress causes physical stress, which impacts productivity and business. Luckily, an employer-sponsored retirement plan provides benefits to the employer as well: 

• Tax advantages: Employer contributions toward an employee’s retirement plan is tax-deductible. So when considering an employee’s total compensation package, retirement plans add to their income, but at a lower cost to the employer. 
• Recruiting and Retention: As mentioned, retirement plans and especially matching contributions are very desirable to employees. Having a plan in place helps with attracting talent. And as we’ll later share, with the right strategy, they can aid recruiting and employee retention.

Whether employers have bought into the idea of retirement plans or not, in some cases, they may not have a choice but to provide them to their workforce. In Colorado, the Colorado Secure Savings Program will require most employers to offer a retirement savings option. So now is an ideal time to consider your options. 

Evaluating Different Types of Employee-Sponsored Retirement Plans

With open enrollment around the corner, you may be considering adding a retirement plan to your benefits offering — or just looking to educate your employees about it. There are a variety of ways employers can improve their workers’ financial wellness. But retirement plans are usually the most attractive option. 

Not every retirement plan is the same — or provides the same benefits to employers and their employees. For one, if you’re in a state like Colorado with increasing regulations around employer benefits, making sure you have a qualified plan is critical. 

Qualified plans meet the requirements of the Employee Retirement Income Security Act of 1974 (ERISA). A qualified plan is required to receive tax benefits and comply with programs like the Colorado Secure Savings program. Qualified plans: 

• Include tax-deductible contributions
• Are permanent — meaning employees can take them when they leave 
• Are openly communicated to employees through a plan document 

There are two types of qualifying plans: defined-benefit plans and defined contribution plans. 

Defined-benefit plans are becoming less popular — such as pensions. Pension plans require an employer to set aside a certain amount of money due to the employee upon retirement. Contributions to these plans are based on salary, years of service, and a percentage rate. So the longer an employee sticks around — the better it is for them. 

However, the risk is on the employer to ensure long-term plans are in place to pay the employee, and they can be expensive to administer. Because of the cost and the fact that most employees don’t work in one company their entire lives, pension plans are less common. 

Defined-contribution plans are the most common type of retirement plan offered by employers. These plans allow employer and/or employee contributions into employee-owned retirement investment accounts. Employees may be able to borrow, with interest, against this type of plan depending on the reason. The early withdrawal of funds may also be permitted in certain circumstances but will incur a 10% penalty. Employees also take on the risk — the value of the funds changes based on the type of investments an employee chooses. 

• 401(k) plans are the most common type of defined-contribution plan. They are fully taxed upon withdrawal and employees can start withdrawing funds at age 59 ½ without penalities. 
• Roth 401(k) plans are the same as a 401(k) with a few exceptions. They’re equally as popular but they don’t offer immediate tax deductions for contributions. Instead, employees pay taxes before contributions are made to their accounts, but no further taxes are due at the time of qualified distribution (including employer contributions and investment earnings). There’s also one other stipulation with this plan — employees have to have had money in the account for five years before withdrawing money. Overall, Roth 401(k) plans benefit those who may end up in higher tax brackets at the time of retirement and those who want to avoid paying taxes altogether on employer contributions and investment earnings.

Depending on the future outlook and what employees are most comfortable with, both types of 401(k) plans are great options. There are many other retirement options out there from SIMPLE 401(k) plans to profit sharing. However, traditional 401(k) and Roth 401(k) plans will be the most desirable and familiar to employees. They also provide the most flexibility if you use a retirement plan as part of a retention strategy. 

Using a Retirement Plan as Part of a Retention Strategy 

Employer-sponsored retirement plans and matching contributions are desirable to workers looking for a job. But they can be just as impactful in retaining employees as they are in attracting them. 

Here are some examples of what employers can do with their contributions, eligibility, and vesting to attract talent and support employee retention: 

• Consider contributions: Employers don’t have to contribute to employees’ retirement plans. The Colorado Secure Savings Program only requires that employers with five or more employees offer a plan for employees to contribute to. But if they do, employers can make nonelective contributions (or contributions to an employee’s retirement account without an employee contributing) or matching contributions where employees have to contribute up to a certain amount to qualify for the match. Even matching contributions up to 50% (i.e. $0.50 for every dollar employees contribute) can add to an employee’s total compensation package.
• Delay eligibility: Typically, employers can’t delay eligibility for a retirement plan past a year. However, delaying enrollment in a retirement plan until a set amount of months of service can make administration easier should they leave — or provide an incentive for employees to settle into a role early on. 
• Create a vesting schedule: There are two types of vesting approaches employers can use that builds based on years of service. One is a cliff vesting approach where an employee has no vested interest until they complete a required length of service such as a year. Then there is a graded vesting approach where a percentage of the employer match is vested each year (e.g. 25% vested after one year, 50% after two, 75% after three, and 100% vested after four years). 

As you can see, there is a lot of flexibility with retirement plans. And retirement plans can and should be a part of your benefits offering and retention strategy. But setting up and administering them is time-consuming and could be costly. Employers have to assess plans, determine contributions, administer, and communicate their plan with employees — and ensure compliance.

For reference, ERISA requires employers to send out communications with defined-contribution plan participants in a plan summary document and annual report. Each year employers also have to file specific tax forms to report retirement income. 

Obsidian HR can help by accessing plans, administering them, and making sure you’re compliant with requirements. To learn more about how we can help and how to improve your other benefit offerings, download the guide below.