How to Plan for Retirement Now that Pensions Are History
In the past 40 years, companies have moved away from offering Pension Plans to employees. Pension Plans are often costly to fund in the beginning years and ongoing if the investments are not successful. In today’s economic climate, companies cannot afford to pay employees, help cover health care costs, and offer a pension plan for retirement. Instead, many companies are offering other retirement planning options to help employees save for their retirement without the company paying for the investment.
A 401(k) Instead of a Pension
Employers see the benefit in offering an employer-sponsored retirement plan. However, they cannot often justify the increased expenses associated with a Pension Plan (such as increased insurance costs and higher employer contributions). Therefore, employers have been looking at other options for employer-sponsored retirement savings plans without the expense of a Pension Plan.
A 401(k) plan is a wonderful opportunity for an employer to offer retirement savings plans without the extreme costs and high-risk of a pension plan. A 401(k) plan allows employers to match contributions for employees. The cost for employers is much lower than a Pension Plan. Employers receive tax benefits for offering 401(k) plans to employees and matching their contributions. Finally, offering employees an employer-sponsored 401(k) plan can help retain valuable employees and provide a sense of appreciation and loyalty.
How Does a 401(k) Plan Work?
A 401(k) plan is an employer-sponsored retirement savings plan that allows employees to invest a portion of their paycheck with either pre-taxed or post-taxed dollars (depending on if the plan is a Roth 401(k) plan). Employees can allocate a percentage of their paycheck to get contributed in their 401(k) plan. The most an employee can contribute per year in 2023 is $22,500. Employees who are 50 or older by the end of the tax year can also contribute an additional $7,500. Each year, the maximum contributions and catch-up contributions are adjusted for inflation.
While employers do not need to contribute to a 401(k), many choose to match employee contributions. Some companies add a P-ST feature to the 401(k) plan. ER contributions are based upon company profits each year, These contributions, along with any matching contributions can be fully vested (100%) immediately or partially vested based upon years of services. When employees are fully vested in the plan, they have the right to all the funds invested by their employer when they leave that employment or retire.
Conclusion
If you are looking for a more cost-effective method to help employees plan for retirement in lieu of a pension plan, you would benefit from considering a 401(k)-retirement savings plan. To learn more about your options, contact the retirement planning specialists at Retirement Plan Services Group. Call Scott Tanker at 609-922-0201 or email scott.tanker@pbsrep.com.