401k Employer Match
A Motivational and Associate Retention Tool
The 401k Employer Match
The Internal Revenue Code allows for but does not require employers to match employees’ contributions to their 401k’s. Until the economic apocalypse befell, most large corporations—including the huge majority of the Fortune 500—discovered that the 401k employer match made very good business sense, because it increased productivity by increasing motivation and morale. And the 401k employer match also increased employee retention, because it gave associates a vested interest in the company’s success. Especially those companies that derived the 401k employer match from profit-sharing found it had huge impact on associates’ performance.
Since the unfortunate collapse of the American economy, may embattled and beleaguered corporations have cancelled or suspended the 401k employer match, because the cut radically reduces their operating costs and drives up their share prices.
The 401k Employer Match from the Company’s Perspective
Very simply, the 401k employer match promotes loyalty, productivity, and profitability. Ceteris paribus the 401k employer match is worth every penny.
Employers have several choices about how to manage and implement the 401k employer match: They can establish profit-sharing plans, which set aside a portion of quarterly, half-yearly, or annual profits and distribute them by a formula that factors-n associates’ time of service, hours worked, and regular pay rate. Distributing the 401k employer match payments, they typically add profit sharing to regular paychecks, therefore sheltering the payments from taxes as all traditional 401k payments are sheltered.
Or they can designate the 401k employer match as a set payment for all 401k plan participants, applying a similar formula for equitable distribution. Beyond these two standards, the IRC allows considerable latitude for employers’ imaginations and innovations, requiring only equity and special attention to employees who make considerably higher than average salaries or wages.
Surveyed on the psychological impact of the 401k employer match, most executives cited its motivational benefit, and documented the change in motivation in markedly higher employee retention among 401k plan participants. “They have a stake in the company,” most executives observed, “so they work harder and stay employed longer.”
The 401k Employer Match from the Associate’s Perspective
“The 401k employer match shows the company cares about me,” most employees commented in a 2006 survey. When the corporation chooses to match employees’ 401k contributions, it gains tax advantages like the employees’, but it especially gains productivity. “Of course, I want to work harder,” the majority of employees reported, “because I make more money for the company, so that they will have more to return to me.”
At the bottom line, however, employees most appreciated the 401(k) employer match, because it took them to the contribution ceiling without affecting their tax status. Many referred to the 401k employer match as “free money.”
The 401k Employer Match from the Small Business Perspective
The law allows for 401k plans among sole proprietors of small businesses. If the owners double as the only employee, they can go on making pre-tax contributions as always; and when they hire more employees, they can expand and diversify their plans to match new employees’ needs. The small business, however, provides the one exception to the benefits of the 401k employer match: most of them cannot afford the investment or the administrative costs associated with the 401k employer match. “I know it would give my employees a much greater sense of ownership in our enterprise,” one entrepreneur regrets, “but until we really become both productive and profitable, I cannot justify the extra costs.” Shaking his head, the entrepreneur adds, “Believe me, I have the 401k employer match on my list of goals. I want to make it happen, but I also want to pay the lease and the utilities.”