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401(k)

A 401(k) plan has advantages for both employer and the employee. As compared to a defined benefit retirement plan, a 401(k) defined contribution plan shifts some of the responsibility for retirement savings and investment to the employee, while still enabling the employer to make discretionary contributions on a tax-free basis. Some employers offer 401(k) plans as a supplement to an existing defined benefit plan.

A 401(k) plan is an expected benefit in many industries and an essential one for a company trying to stay competitive in hiring of qualified personnel. Matching and profit sharing contributions provide additional incentives for hiring and retaining the workforce.

Disadvantages of a 401(k) plan include the administrative costs and complexities of managing the plans. There are significant administrative requirements even when using the services of outside providers. The employer must also accept fiduciary responsibility for plan administration.

The advantages to employees are substantial, allowing tax-deferred investment savings for retirement. Qualified 401(k) plans may allow the employee to direct his or her own investments, with considerable flexibility for changing deferral and investment options as individual circumstances change. Deferral limitations are far more liberal than in deductible IRA contributions.

For employees in lower tax brackets, the savings may not be quite as attractive as for the more highly compensated. However, it is still a convenient and important vehicle for retirement savings, and liberal loan provisions lower the risk of having to take taxable distributions with the related penalties.

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