Competitive base pay, medical insurance and a 401k plan are the must have benefits necessary to attract and keep talent in your company. According to a study by Watson Wyatt Worldwide, related in The Human Capital Edge: 21 People Management Practices Your Company Must Implement (or Avoid) to Maximize Shareholder Value (compare prices), companies that emphasize better benefits and use them to attract and retain high caliber staff add 7.3 percent in additional profit to their bottom line.
This makes your 401k and other retirement benefits cornerstones for your Human Resources recruitment and retention strategy. Do you know everything you need to know to serve as the "go-to" source for this information?
What is a 401k Retirement Plan?The 401k retirement plan provides a means for employees to accumulate retirement income. According to William Sullivan in Human Resources for Small Businesses (compare prices), the government permits employers to sponsor 401k plans to encourage employees to save for retirement.
"These plans enable employees to apportion a fixed percentage of their paycheck as savings on a pre-tax basis, before most withholding taxes are deducted. The money is deposited into a trust account with a bank or other financial services company for investment purposes."
Sullivan says that, "Account balances are maintained separately for each participating employee and investment earnings are sheltered from taxation enabling savings to compound at an accelerated rate. Regulatory restrictions and penalties exist for withdrawals made prior to retirement."
The 401k is the most flexible type of retirement plan. Employers can contribute to the plan for employees or your company can sponsor a plan to which only the employees contribute with salary deferral. The 401k plan may be most appropriate for companies with at least 10 employees. You will find an excellent resource that discusses the benefits and details of a 401k plan at the 401k Help Center. For retirement planning resources, in general, and more about 401ks, see About's Retirement Planning Center.
Why Have a 401k Retirement Plan?There are four main reasons why you will want to consider sponsoring a 401k plan in your workplace.
A 401k retirement plan demonstrates that you care about and value your employees and want to provide a means for them to plan for their future. According to the Fidelity 401k Web site, experts estimate that "each of us will need between 60 percent and 80 percent of our final annual working income every year that we're retired. Since Social Security typically provides only 40 percent of the average retiree's income, many of us will need to rely on our own savings and investments."
A 401k retirement plan has tax advantages for the employer and the employee, including tax-deductible advantages for the employer and tax deferred growth for the employee.
Use the 401k retirement plan to attract high quality employees. According to a survey of 900 of its member companies, WorldatWork determined that 95 percent of them offered a 401k plan. 93 percent of the companies surveyed provide a contribution or some type of match to the employee's individual 401k contribution. Can you afford to ignore this trend and expect to recruit and retain excellent employees?
The 401k retirement plan helps you retain high quality employees. Your best employees expect the best benefits and pay. Need I say more?
There are four key questions you need to ask as you explore your options for a 401k plan.
- You'll want to know what the 401k retirement plan will cost you to implement. Considering the percentage of employers who offer some kind of funds match for employee contributions, you'll want to consider matching a percentage of the employee contribution as well. Take a look also at whether you have employees who make substantial salaries and who are likely to contribute to the plan.
- You will want to discover how much time and effort the 401k retirement plan will require from you to set up and manage. Different choices relative to plan choices and administrators will impact these factors.
- You will want to explore the investment options that are available in any 401k retirement plan you consider. Recently, I surveyed 401k retirement plan options that ranged between eight and thirty-some investment choices.
- You want your plan to serve as a recruiting magnet for the best possible employees. Consider carefully how the 401k retirement plan will meet your business purposes and objectives. Consider how your plan will fit with the overall compensation package you offer your employees.
- Think about how you will use and publicize your 401k retirement plan to attract and retain outstanding staff.
Recommendations for Employers With 401k Retirement PlansYou can maximize the impact of your 401k retirement plan to benefit the people you employ. These necessary and recommended actions will help you create an appreciated, valued benefit that helps you achieve your business goals.
- The most important advice I have to offer you comes from Bruce Pfau and Ira Kay who authored The Human Capital Edge. They emphasize that benefits become valuable when employees understand their benefits and the value of their benefits.
- According to Pfau and Kay, "The companies that get the biggest return on their investment in these programs are those that also commit resources to making sure employees understand those benefits and their linkage to a company's desired culture. Shareholder value and employee commitment are markedly higher at companies whose workers know how much their package is worth and what their benefits mean to them personally." (page 153)
The same study found that targeted communications and specific advice about the company's 401k plan is just as likely to convince employees to save for retirement as is a high employer contribution match. "A recent study examined 401k plans at 15 U.S. firms, ranging in size from 700 to 10,000 employees. Employees who received targeted 401k communications saved two percentage points more of their pay than those who did not. Raising match rates from 25 to 100 percent achieved exactly the same effect -- but at considerably higher cost to the employer." (page 154)
- why your organization offers the particular set of benefits that it does;
- what the benefits cost the employer; and .
- the corporate culture and strategy that your particular benefits package supports.
Education and communication about the 401k retirement plan and other benefits is ongoing and frequent in companies that use their benefits to their competitive advantage in attracting and retaining staff.
Show your staff what their retirement benefits will look like if they begin to save earlier in their careers. Provide the information necessary to make your employees knowledgeable consumers. Note that I am not suggesting that the employer offer investment advice, just information that will help your employees make decisions about their own investments in conjunction with their own financial advisors.
Continue to educate your employees about risk, investing, and how to pay attention to their retirement savings. In the long run, they'll remember working for you with pleasure. They'll thank their lucky stars that they had good investing information. They'll know their employer's 401k plan laid the cornerstone for their future economic success and happiness. They'll remember.