FooCorp wants to provide $100 worth of benefit per month to its employee Jane.
Why would it decide to match anher contribution to her 401(k) account, up to a limit of $100, rather than simply FooCorp making a $100 contribution regardless of how much or little Jane sets aside?
I understand that it provides a good incentive for Jane to save, but what’s in it for FooCorp? Is there some tax advantage specifically related to the matching?
Many people don’t contribute to their 401(k), or don’t contribute the maximum amount. The employer match allows the employer to advertise a great benefit (free money!) without having to spend a lot on everyone.
It encourages positive activity: Saving for retirement.
There are benefits to employers and employees:
The employee is encouraged to save for retirement. Obviously, it helps the employee, but it helps the employer, because as some point in time, they are going to want you to retire, and you are more likely to do so if you saved for retirement.
It also helps with the sustainability of the employee retirement plan.
Believe it or not, when unemployment rates are very low, say 4.5%, most companies need to have incentives that lure good employees. Employers compete for people/talent.
It’s important to help the employer comply with the “highly-compensated employee” contribution limits.
Basically, in order to prevent companies from designing 401k plans that benefit the top guys but aren’t good for the people down at the bottom, there are rules which say that employees which are “highly compensated” have a lower maximum contribution if non-highly-compensated employees don’t contribute at least a certain amount. The match is an incentive to get those non-highly-compensated employees to contribute.
The part I bolded made me go 
and :dubious:.
Not understanding the bolding = naive to business
When you get close to retirement, but hang on year after year… many big companies just want you to go already…
Well, there’s this- for decades and decades, companies provided a pension. Not many do anymore. Far cheaper for them is a 401K, even with 5% matching, and it’s not a bad deal for the employee either, in these days where few will work for the same company for 20+ years.
As Philster sez, even in today’s market you do need to remain competitive and be able to attract and maintain good employees. Benefits are a very good way to do this.
It’s like asking “what’s in it for my company to offer paid vacations or holidays?” or even “paying more than minimum wage?”.
When first created, 401K plans (and IRAs’) were intended to be a ‘third leg’ of retirement security, a savings and investment plan to go with Social Security and regular pension plans. It was introduced as a way for highly compensated employees (executives) to defer taxes on a portion of their income.
Over time, it has resulted in employers using it as a replacement for traditional pensions, leaving it and IRA’s as the main source of retirement funds for workers.
So, one advantage to 401k matches is that it has replaced traditional pensions, a huge savings for corporations.
Remember you’re not vested immediately either. If you have to stay with a company three years to keep the matching amount and the turn over average in the company is 18 months, the company isn’t going to lose much, 'cause most people won’t get to keep the match and it’ll go back to the company.
401K or “defined contribution” plans became more popular once pension or “defined benefit” plans began to fall out of favor. Since pension plans pay out a guaranteed fixed amount every month years into the future, they create a very risky liability on a company’s balance sheet. Under ERISA, companies are required to maintain a minimum level of assets to support their future pension obligations. The value of the obligations and the value of the assets that support them are dependent on many factors, most which are out of a company’s control. The primary variables are capital market returns and interest rates. The pension plan was traditionally regarded as a tool to retain employees. Pension benefits grow exponentially over time, which creates a big incentive for a worker to stay at a company, in lieu of moving somewhere else. Unfortunately, companies and labor unions did a very poor job in understanding the significant risk that pensions create, and many companies have gone bankrupt because of their pensions. A long-running joke about GM was that the company was really a pension plan that made cars on the side.
The long lasting bull markets of the past few decades and the relative ease of relocating to distant parts of the country created a shift in worker demand for pensions. They were no longer valued the same way as in the past by workers. Workers no longer expected to stay with a company for their entire working life. Thus, its benefit as a retention tool was reduced. But companies were still competing with each other to acquire newer and better employees. This created the popularity of the defined contribution plan.
In a DC plan, companies contribute a fixed amount every month. The company also provides an array of investment choices through a 3rd party (like Vanguard or T. Rowe Price). There is no money paid out from the company at a later date, thus no future liability to the company. The risk is transferred to the worker. If he or she makes bad or unfortunate investment choices, too bad.
In short, a 401K plan allows a company to compete with other companies for the best talent. If your competitor offers a 401K and you don’t, guess which offer your best candidate will take.
Company matching typically doesn’t “vest” for a period of time, often something like five years. If the employee leaves the company, any portion that has not yet vested reverts to the company’s ownership, along with any gains (or losses, heh) made over that period of time. Many other employees fail to take full advantage of the employer matching in the first place, by setting aside less than the maximum or nothing at all. So for a significant portion of the workforce, there’s little cost to the company at all.
As for the rest, they just take it out of your hide in other ways.
This is exactly correct and is the main reason companies push it
That would be me. Worked for 35+ years, occasionally as contractor/self employed but mostly as an employee, never worked at any one company long enough to qualify for a pension, but took full advantage of whatever IRA / SEP / 401(k) / Individual 401(k) plan applied at the time (and also made damned sure that I put in enough to take full advantage of any company matching). Now retired and doing just fine.
Huh. The companies I’ve worked for and interviewed with have all had their 401k plans vest immediately. Maybe it depends on the industry.
It’s three years here. It’s a “golden handcuff” to help retain employees.
Maybe some confusion here. Typically the plans vest immediately at 100% for the employee’s contribution but it takes several years for the employer’s company matching contribution to vest at 100%. For example, the first year might be employee 100% employer 25%; the next year is employee 100% employer 50%, and so on until the company matching is vested at 100%. The vesting is ramped up over the years as a retention mechanism.
Yes, I know the difference, and employer contribution vesting immediately seems to be standard in my industry (aerospace & defense). Standard pension plans are rare. The one place I know that still had a standard pension plan had a five-year vestment schedule for it, but their 401k plan still vested immediately.
Same here. Ours is 100% vested 401k from day one, with 100% vesting in the pension at 3 years. Before the 3 years you get nothing in the pension, but you would still get all of your 401k.
Perhaps there’s less employee turnover in those govt industries so it’s not such a big deal if the vesting was 100% immediately. In the tech companies I was at, the 100% vesting of the employer’s contribution was delayed.
A delay of 100% vested 401k doesn’t look that unusual. Here’s excerpt from this webpage:
There are two kinds of vesting schedules: graded and cliff.
Under a graded plan, workers gain the right to keep a little bit more of the employer’s matching money for each year they remain on the job. For example, under a five-year vesting schedule, workers might become 20% vested after one year, 40% after two and so on until they have the right to keep all of the matching funds in their account. Federal law allows graded vesting systems to stretch out for up to six years.
Under a cliff plan, workers go from 0% vested to 100% after a certain amount of time has passed. Federal law caps the maximum cliff vesting period at three years.
Pleonast , I’m in aerospace and defense and have never had a straight 100% vesting of the employer contribution, though I will admit I have only ever worked at small companies.
Most of the companies I’ve seen do the graded vesting. In my last company it was over five years, which makes sense since in the history of that company, they have only had one employee other than the CEO who has actually been there that long. Everyone else averages around 1-2 years, as the management treats their employees like dogshit.