Employee retirement plans to consider for your benefits package

Offering retirement benefits allows you to take care of the people who make your business a success: your employees. It can also help your organization, as the long-term financial security employee retirement plans provide can help attract and retain talent.

With so many options—each with unique benefits, tax advantages and contribution limits—finding the right fit can feel overwhelming. From 401(k)s to SEP IRAs, each of the employee retirement plans has features that work best for businesses of a certain size and with particular employee needs. Understanding the differences between these plans can help you find the right solution.

Here's a look at some of the most popular plan options so you can choose the package that best meets your goals for supporting employees.

401(k) plans

For decades, 401(k) plans have dominated the employer retirement market, especially among medium- and large-sized businesses. These plans allow your employees to build retirement assets while giving you flexibility when it comes to contributions.

As the plan's sponsor, you provide participants with a menu of investments that may include mutual funds, target-date funds and — in the case of a publicly traded entity — your company's stock. In 2024, employees under age 50 can contribute up to $23,000 pretax, which grows tax-deferred. The employer can match a percentage of employee contributions up to a certain limit, allowing you to control costs.

One of the benefits of a 401(k) plan is that you can choose to accept both traditional (pretax) and Roth (post-tax) contributions. Because Roth accounts allow participants to withdraw their assets tax-free in retirement and don't have required minimum distributions (RMDs), this can be an attractive option for many employees.

Pros

• The contribution limits are relatively high, with the total investment — including employee contributions —maxed out at $69,000 or 100% of the employee's compensation, if that's less.
• Participants can control how much they contribute, which can assist with employee recruitment.
• You can offer pretax or post-tax contributions, allowing your employees to select a strategy that meets their long-term needs.

Cons

• The setup and ongoing administrative costs of a 401(k) can be challenging for some smaller businesses.
• A 401(k) is subject to reporting and disclosure requirements, including potential compliance testing to ensure the plan doesn't unfairly favor higher earners.

SIMPLE IRAs

A Savings Incentive Match Plan for Employees individual retirement account (SIMPLE IRA) is a retirement plan designed for organizations with 100 or fewer employees. Compared to a 401(k), these plans offer less complexity and lower costs, which can be a big draw for small businesses.

Employees can contribute up to $16,000 in 2024, with a catch-up contribution limit of $3,500 for those 50 and older. Meanwhile, employers are required to make one of the following contributions:

• A matching contribution equal to each employee's full contribution, up to 3% of their salary.
• A nonelective contribution that's 2% of wages for each employee, even if they don't make contributions.

Pros

• SIMPLE IRAs usually have fewer reporting requirements and lower administrative costs than 401(k) plans.
• Both employer and employee contributions are 100% vested immediately.

Cons

• The contribution limits are lower compared to 401(k)s.
• Employers have less flexibility regarding how much they can put into each account.
• No Roth option is available.

SEP IRAs

Simplified Employee Pension (SEP) IRAs are another retirement plan option for small business owners, although they're generally best for self-employed individuals or those with a small staff. As with traditional 401(k)s and SIMPLE IRAs, contributions are tax-deductible, and money in the account grows tax-deferred until age 59½.

While SEP IRAs are easy to set up and administer, they have less flexibility for funding the account. Only employers can make contributions, and they must invest the same percentage (up to 25% of salary) for every employee. For instance, if the owner contributes 10% of their income to the account, they must pitch in 10% of each eligible employee's salary too.

Pros

• Less paperwork is involved compared to 401(k) plans.
• Employers don't have to make contributions every year, allowing them to make decisions based on business performance.
• Roth contributions are allowed, a feature that's not available with SIMPLE IRAs.

Cons

• Businesses are required to put in the same percentage of salary for every employee.
• No catch-up contributions are offered for employees age 50 or older.

3 tips for helping your employees save

Choosing a retirement plan is the first step toward helping your employees develop a secure financial future. Once you establish a retirement plan, consider using these three strategies to help your team members get the most out of this benefit.

1. Think about your matching strategy

Many companies offer a matching contribution that maxes out at a certain percentage — for example, 6% of an employee's income. However, implementing a fixed dollar cap for the company match can encourage lower-paid employees to save more for retirement.

2. Consider auto-enrollment

If you have a plan that allows employee contributions, such as a 401(k) or SIMPLE IRA, make it easy for workers to enroll. Give new hires information about the plan and contact information for a benefits specialist who can help them get started. You can also send periodic reminders to employees who aren't currently participating.

3. Invest in financial education

Communicate the benefits of diligently saving with your employees. Consider hosting regular financial education sessions that can help build financial literacy. You may even provide articles and tools, such as retirement calculators, that help your workers better track their savings progress.

Your trusted partner for retirement plans

A competitive benefits package can help your company boost employee satisfaction and drive long-term success. At Optavise, we help employers and employees make better benefits choices, offering a full suite of voluntary benefits, benefits administration technology and advocacy services that enable you to get the most out of your program.