How To: Navigate Your Employer Retirement Plan

In this article: Employer-sponsored retirement plans are designed to attract talent and maintain indispensable employees.

Published Jul. 23, 2020

Reading Time: 5 minutes.

Employer-sponsored retirement plans are designed to attract talent, maintain indispensable employees, and ensure employees are able to continue to save for their retirement. Employer retirement plans are also a great way to start building your nest egg, as there are beneficial tax implications of opting in to an employer retirement plan. Some companies even offer an employer-match to the amount you contribute, which can further increase your nest egg’s size. Employer-sponsored retirement plans vary widely, depending on your employer’s size and industry sector. 

The Seven Most Common Employer-Sponsored Retirement Plans are: 

1. 401(k) Plans

401(k) Plans are the most common of all employer-sponsored retirement plans. These are defined contribution plans funded primarily by the employee, sometimes with an employer match of varying value. Note that these are most often offered at for-profit businesses. Traditional 401k plans are tax-deferred, meaning dollars are taken out of your paycheck pretax, and taxes are paid on the amount when you withdraw the funds in retirement.  

2. Defined Benefit Pension Plans

Defined Benefit Pension Plans are also often known as traditional retirement plans.  All contributions are supplied by the employer based on your income and how long you’ve been with the company. The employee has no control or access to these funds until retirement age.

3. Roth 401(k) Plan

Roth 401(k) plans and their respective contributions, like Roth IRAs, are not tax-deductible. Instead, investment earnings are initially taxed pre-contribution, and distributions upon retirement age are tax-free. This employer-sponsored retirement plan carries early withdrawal and distribution penalties, as well as being subject to required minimum distributions (RMDs). 

4. 457 Plan 

If you work for a state or local government, you likely have a 457 plan. They have identical contribution limits to and function similarly to 401(k) plans. 456 Plans are tax-deferred like 401(k)s and the amounts you withdraw in retirement will be taxed. The one big difference is that if you have both a 401(k) plan and a 457 plan, you can contribute to both

5. 403(b) Plan

You’re likely enrolled in a 403(b) plan if you work for a nonprofit organization, such as a hospital, a public school system, or a religious institution. These plans are made up primarily of tax-deductible employee contributions. 403(b) plans have identical contribution limits to 401(k) plans and work similarly.

6. SIMPLE Plan 

Savings Incentive Match Plan for Employees, also known as SIMPLE 401k or SIMPLE IRA plans, are 401ks or IRAs typically offered by smaller businesses, specifically with less than 100 employees.

 With a SIMPLE 401k plan, employee contribution limits in 2020 are $13,500 in 2020, and if 50 or over, an additional “catch-up” of $3,000 max contribution is allowed. The employer must make a dollar-for-dollar match of up to 3% of your pay, or a 2% non-elective contribution. 

With the SIMPLE IRA, you’ll make tax-deductible contributions that your employer must either match up to 3% of your salary or make nonelective contributions. With this plan, you can participate in other retirement plans from a previous employer in the same year, but will have a limit on contributions. In 2020, the maximum contribution to a SIMPLE IRA IS $13,500 and if you’re over 50, you can make catch-up contributions (max $3,000).

7. SEP Plan 

A Simplified Employee Pension Plan, also known as a SEP plan or a SEP-IRA plan, is often used by small companies to grant their employees an employer-sponsored retirement plan. SEPs allow business owners to contribute to employee retirement plans as well as their own. These contributions are made to an Individual Retirement Account (IRA) for each participant. SEPs are identical to a traditional IRA in terms of rollover and distribution requirements but have the benefit of far more generous contribution limits. You can contribute 25% or less of your compensation, for a maximum of $57,000 (in 2019).

How Do You Benefit from an Employer-Sponsored 401k Retirement Plan?

Employer-sponsored retirement plans are a great way to save towards retirement. Not only is it a “set it and forget it” way to save, but it can also help your tax savings via tax-deferred contributions. When a contribution is made into an employee’s 401k plan, the money deposited falls into a pre-tax category. This means that before taxes affect income dollars, an employee’s compensation goes directly into the plan. As a result, an employee’s taxed-revenue is reduced. 

However, employer-sponsored retirement plans are not without their disadvantages. Should an employee under the age of 59.5 wish to withdraw money from their plan, they’ll find themselves owing taxes on the withdrawn amount, plus an additional 10%. This is why prudent and consistent retirement planning is the best way to ensure you’re saving properly for the retirement you wish to live.

What Can You Expect with an Employer-Sponsored Retirement Plan?

Americans who engage in an employer-sponsored retirement plan generally contribute 7.7% of their income to their plan. To put this in perspective, a 35-year old employee earning an annual salary of $60,000 will find themselves with an additional $85,000 at retirement age. When contributing employees are matched by their employers, there is an average annual savings of 12.9%. Of this amount, the typical employer contributes 5.2%. The recommended total savings rate is between 10%-15%.

If your employer offers contribution-matching, keep in mind that there is often fine print related to receiving 100% of what has been matched by the employer. Should you decide to leave the company prior to the stipulated time requirement, any self-made contributions are still completely yours. 

Choosing the Right Employer-Sponsored Retirement Plan for You

Given the benefits that employer-sponsored retirement plans offer, it’s hard to believe that only approximately 31% of American employees currently contribute to one. A fiduciary financial advisor can help guide you in selecting the plan that suits your life situation and retirement goals best. As an employee, you can only benefit from an employer-sponsored retirement plan, but selecting the right one is critical in thoughtfully growing your nest egg. Make sure to talk with your fiduciary financial advisor regarding how you can make the most of your employer retirement plan as well as how to best utilize the funds so you can live a life well planned. 

Disclosure: This blog is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

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