401(k) Plan: Benefits and Benchmarking

Posted: 1-15-25 | Connor McDevitt, CRPS®, CPFA®

401(k) Plan: Benefits and Benchmarking

As an employer, offering a comprehensive 401(k) plan can be one of the most powerful tools to attract and retain top talent while helping employees prepare for their financial future. For employees, a 401(k) offers a structured and tax-advantaged way to save for retirement with the added bonus of potential employer contributions that can significantly boost savings. But how do you ensure your company’s 401(k) plan is competitive, cost-effective, and provides maximum value to your employees? In this blog, we highlight the benefits of a 401(k) plan and discuss the importance of regular benchmarking for employers and participants.

What is a 401(k) Plan?

A 401(k) plan is a qualified, employer-sponsored retirement plan that allows employees to contribute part of their paycheck to save for retirement. Companies withhold a specified dollar amount or percentage of the employee’s pay then fund the retirement plan on their behalf each pay period. Once the money is deposited into the plan, the employee can choose how to invest based on the investment options available to them. And many plans typically have at least ten investment options to select from. Despite most employers offering contributions to their employees, as a participant-directed plan, the employee invests how they best see fit. And although 401(k) contributions are typically done with pre-tax dollars, many plans allow for Roth 401(k) contributions as well which are after-tax.

What are the benefits of a 401(k) plan?

Employer Benefits:

Attracting and Retaining Top Talent:
Offering employees a 401(k) plan with a competitive match is a tool often used to attract and retain top talent. A company’s 401(k) plan is among one of the most important factors for prospective employees when considering employment with a company. Regularly reviewing and benchmarking 401(k) plan offerings will help ensure the plan remains competitive and beneficial for employees. This benefit can also help reduce employee turnover and encourage employees to stay with a company if a competitive match is offered.

Tax Advantages:
Employer contributions to 401(k) plans are considered a tax-deductible business expense. This reduces their taxable income and payroll taxes while offering an incentive to employees. For example, if a company offers $50k to all employees through a company match, they will not have to pay taxes on that expense.

Flexible Plan Design:
Additionally, 401(k) plans have a flexible plan design that allows employers to adjust over time to fit the changing needs of the company and its employees. Companies can adjust the eligibility requirements, vesting schedules, and other plan features to what is most suitable for the company. For example, a company may require employees to wait a year before they are eligible to participate in the plan, then later amend to six months to be less restrictive.

Employee Benefits:

Financial Readiness:
A 401(k) plan allows employees the opportunity to save for retirement by contributing a portion of their income toward their retirement savings. Many employers offer matching or profit-sharing contributions to the 401(k) plan which can significantly boost an employee’s retirement savings. As markets historically trend upward, 401(k)s typically allow for investment growth as well. From a holistic standpoint, having a 401(k) encourages one to think about their retirement and determine if they are on the right track to meet their goals.

Tax Advantages:
Contributions to a traditional 401(k) are made on a pre-tax basis, reducing the employee’s taxable income in the current year. The investments in the 401(k) plan grow on a tax-deferred basis until withdrawal in retirement, allowing for faster accumulation of retirement savings.

Portability:
If an employee chooses to leave their company, they can roll over their 401(k) into their new company plan or into an IRA. As long as the funds are transferred to another qualified plan, there are no tax implications.

Helpful Provisions:
Employees over age 50 have the opportunity to make catch-up contributions. While the contribution limit for those under age 50 is $23,500, there is a $7,500 catch-up contribution to help them save more as they approach retirement. Some 401(k) plans allow employees to take out loans or make hardship withdrawals from their accounts. Although this is generally discouraged, the loan allows you to pay yourself back at a lower interest rate than banks offer. Participants have the option to withdraw for events including a first-time home purchase, qualified medical expenses, and secondary education without the 10% withdrawal penalty.

Should I Consider a Roth 401(k)?

 Many 401(k) plans offer a Roth 401(k) option. Unlike traditional 401(k) contributions that are made on a pre-tax basis, Roth 401(k) contributions are made with after-tax dollars. Participants pay taxes upfront, but withdrawals in retirement are tax-free. Although employee contributions to a Roth 401(k) are made after-tax, any employer contributions are still made on a pre-tax basis, meaning they will be taxed when withdrawn in retirement.

A Roth 401(k) can be particularly beneficial for younger employees who are in a lower tax bracket now, as they can lock in a lower tax rate on their contributions. Additionally, having both pre-tax and Roth 401(k) accounts provides greater flexibility and tax diversification in retirement.

How Does a 401(k) Compare to Other Retirement Savings Options?

2025 Retirement Plan Comparisons

401(k) plans have higher contribution limits compared to IRAs. Employees can contribute up to $23,500 per year (or $31,000 for those over 50), while IRAs have a limit of $7,000 (or $8,000 for those over 50). They also allow for both employee and employer contributions, whereas a SEP IRA and Profit Sharing plan only allow for employer contributions. 401(k) plans offer more flexibility in plan design than Simple IRAs, SEP IRAs, and profit-sharing plans, allowing employers to adjust eligibility requirements, vesting schedules, and other features over time. In comparison, they also offer more portability and withdrawal options than other retirement plan types.

Setting up a 401k / Annual Plan Review & Benchmarking

401k Administrator and Client Relationship Chart

An employer is responsible for ensuring the 401(k) plan is operating in the employees’ best interests. Regularly reviewing and benchmarking the plan is part of fulfilling this duty and, according to the Department of Labor and ERISA, should be done every two to three years. Employers should review the investment options offered in the 401(k) plan and evaluate their performance compared to benchmarks to help ensure the plan is providing competitive investment choices for employees. It is also important to review the costs associated with the 401(k) plan,  including third-party administration fees, recordkeeping fees, advisory fees, and investment fees. Employers should compare their 401(k) plan features to industry peers, including contribution matches, eligibility requirements, and plan design, to help ensure it remains competitive.

Working with an advisor can help relieve an employer’s burden of monitoring the investment options and making any necessary changes. The Retirement Plan Services team at Innovia Wealth offers comprehensive analysis and benchmarking of 401(k) plans, including a review of costs, investments, and fiduciary responsibilities. Innovia acts as a single point of contact for the employer by coordinating with the various service providers to help ensure the plan is operating efficiently.

If you are interested in streamlining the management of your 401(k) plan, contact us today.