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Should You Offer Employees a Matching 401K?

Adam Groff

July 05, 2013

When deciding whether or not to offer your small business employees a matching 401k plan, there are some particular things to keep in mind.

Not only do 401k plans help your employees financially prepare for retirement, they also encourage employee loyalty. But, not everything about a matching 401k plan is music to a company’s ears.

With that in mind, here are a few pros and cons that go along with offering your employees a matching 401k as well as some small business statistics:

Small Business 401k Statistics

According to the latest National Compensation Survey, which is completed each year by the United States Labor Department, 63% of small businesses offer their employees 401k retirement plans.

In addition, of that number of small businesses, 35% offer the minimum matching percentages. Although this isn’t uncommon with smaller companies, more employees are taking notice and, as a result, taking jobs with larger, 401k friendly companies.

When making the 401k decision, your small business should consider both the advantages as well as the drawbacks. Here are a few of each:

The Pros

The main idea behind a 401k plan is offering peace of mind to your employees. And, with employee peace of mind also comes an increase in productivity, which is just one of the many win-win benefits of 401k matching plans.

Retaining Top Performers – When your company matches its employees 401k plan, it encourages a long-term relationship. And, considering the costs involved with losing top employees as well as the time it takes to find adequate replacements, matching your employees’ 401k pays for itself in the long run.

Deductible Contributions – Every time your small business makes a matching contribution to an employee’s 401k plan, it’s tax deductible.

50% of the first 6% – For small businesses especially, 401k plans offer payment caps dependant on employee contributions. One of the most common forms of 401k payment caps is 50% of the first 6%, which definitely keeps the company in mind.

Under this particular plan, your company matches 50% of every contribution an employee puts in their 401k. But, once an employee reaches contributions equal to 6% of their gross salary, employer contributions stop until the following year.

Low Cost Plans – A new version of the company-wide 401k plan is tailored specifically to small businesses. With the 401k for small business, companies with 20 employees or less pay a one-time setup fee and drastically lower monthly payments.

In addition, there’s also a small business 401k plan tax credit available for the first three years your company uses the matching plan.

The Cons

Before your business decides to offer its employees a matching plan based on the information above, there are some drawbacks involved with 401k employee matching plans.

Vesting – Although 401k vesting is simply a failsafe for companies in the event an employee quits before they’ve fully contributed to their plan, most employees see it as a huge negative, thus negatively affecting the employee to company relationship.

Investment Options – Because your employees’ 401k is limited to whatever investments your company sees fit, it’s impossible to make every employee happy in terms of diversified investments.

Additional Expenses – Regardless of the 401k plan, most companies are charged heavily with fees related to investment management, record keeping, and filing yearly paperwork with the government.

Pros and cons aside, when your small business invests in the future of its employees with a 401k, it’s investing in the future success of the business as well.

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