How 401 k Plans Work

Employers Benefit and Responsibility

Why would employers offer 401(k) plans? What's in it for them? There are actually several benefits for employers. For one thing, the job market often demands it. In order to get the best and brightest employees, companies have to offer attractive benefit programs. The 401(k) plan can, therefore, help in recruiting.

Employer contributions to the 401(k) plan can also be tied in with company profits and other corporate goals. In other words, it can act as an incentive plan to encourage employees to work harder and smarter in order for the company to do well. If company goals are met, then the employer contribution level may be higher.

The 401(k) plan is also less expensive than defined-benefit plans, which guarantee a specific (defined) amount be given to you when you retire. Also, the overhead and administrative costs of the 401(k) plan, as well as any matched contributions the employer makes, are tax-deductible expenses.

Remember also that employers have their own financial future at stake, so offering a good 401(k) plan for employees will benefit them as well.

When employers decide to offer a 401(k) plan to employees, there are several steps they have to go through, both initially and on an ongoing basis. The first thing they'll do is invite several different plan providers to submit proposals for their plans. Every plan provider will have administrative fees and other costs that can vary quite a bit from provider to provider. They will also have different levels of services that may or may not be free.

In order to get the best deal that will meet the needs of the company, employers have to first make sure they are comparing apples to apples by ensuring that all of the providers are giving them the same information. The U.S. Department of Labor's Employee Benefits Security Administration offers a uniform fee disclosure form that is available for download. By using this form, the employer can uniformly request information from plan providers. There are several aspects of each individual plan they also need to look at, including:

  • Features - This includes the number of investment options, the types of investments, the availability of Internet access and trading, and loan features.
  • Fees - How are the plan's fees are charged? For example, some fees can be charged directly to the overall plan, while others may be deducted from investment returns.
  • Services - What services does the plan offer? Which of those are free and which incur an additional charge?
  • Fee variations - What the fee variations for different types of investment options?
  • Restrictions - Are there rules against early termination of the plan with that provider?
  • Educational assistance - How much help is available for employees? Is that service free or is it offered for a fee?
  • Customer service - What kind of customer service will the employer receive? How can the plan be modified as the company's needs change?

Some of these items are optional things that the employer will have to decide about. For instance, there may be features of the plan that the employer doesn't want to make available. The employer then has to decide which of the fees will be paid by the company and which will be paid by employees.

The average 401(k) plan that includes matching contribution costs runs from two percent to three percent of payroll.