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Why 401(k) Plans Work

Ben Renner

Ben Renner

share educational videos with employeesAt the top of many employee benefits and compensation plans is usually a retirement plan. The most common retirement plan these days is still the good old 401(k). Why is it so popular and how does it work?

401(k) plans are so common in many organizations’ employee benefits and compensation plans because they’re fairly easy to understand and use. Many employees come in with an idea of how these plans work, and if they don’t, explaining the concepts to them isn’t too complex.

How 401(k)s Help Your Employee Benefits and Compensation Programs

The short answer is they help provide your employees with security and peace of mind. Saving for retirement will never go out of style, and it’s never too early to start saving. For many workers, especially those worried over things like Social Security and for whom retirement seems a long way off, saving for retirement brings stress and anxiety. A 401(k) contribution plan is a simple way HR managers and company executives can relieve some of that anxiety by providing a solution.

Better retirement options mean less-stressed, more loyal employees. A 401(k) plan is by no means the only retirement savings option, but it’s often the most-used because of its relatively uncomplicated yet effective investment strategy that employees have control of.

How it Works

Employees can choose how much of each paycheck they want to contribute to their 401(k) accounts. Some employers even match these contributions to encourage participation and give their employees a little extra. With traditional 401(k)s, the contributions are taken from the paycheck before taxes are deducted. This means that employees don’t have to pay taxes on their 401(k) balances until they start deducting money from the account to live on. Roth 401(k) plans are the opposite: employees pay taxes on their contributions up front, then pay no taxes on their plan when they retire. There are no restrictions on how the money can be used once employees retire.

The above explanation glosses over several complex regulations and tax implications that are best hashed out with an accountant. As an employer, providing resources to your employees to help them make informed decisions about their investments is just another way you can help your employees ease their stress and get the right products for themselves. Offering several different options in these 401(k) plans is a great way to ensure that your employees are handling their retirement issues in ways that benefit them, which, in turn, benefit you.

Videos and Helpful Resources

Explainer videos can make all the difference. Listening to an employee benefits and compensation expert drone on about 401(k)s isn’t as useful as a short video succinctly explaining the basics of the plan. Make these videos accessible to all and ready for anyone to view and learn more about what types of retirement options are out there. Almost every employee benefits and compensation plan could benefit from a comprehensive array of 401(k) options.

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