Advantages and Disadvantages of a 401k plan to the Employer and Employee

A 401(k) plan is a retirement account to which employee and employer contribute, on which taxes are deferred until withdrawal, and for which the employee selects the types of investments. As with anything to do with the Internal Revenue Service, the 401(k) plan has many ups and downs and many regulations that must be followed. This makes things more difficult for both the employer and employee in making decisions about the plan. We have taken a look at the advantages and disadvantages of the plan from both sides of the table to show what all is involved in deciding to use a 401(k) plan. We then give a comparison and contrast of two major companies that use this plan as an option to their employees, and weigh the good and bad points of their particular plan. With this information it makes things a little clearer as to whether or not a 401(k) plan is the definite way to go.

First, we take a look at the advantages to the employers to see if it is worth it for them to offer this plan to their employees. The low cost of the plan makes it very desirable. No employer contributions are necessary because the plan can be entirely funded with contributions from your employees' salaries. Companies do not have to offer any vesting options, u

Record keeping can be a very big disadvantage to an employer offering the 401(k) plan. The cost can become very high and requires the organization to hire new employees to handle this job, not to mention that if they mess up somewhere it could cause many problems. They might lose some of the employee's money,or give them more than they should have. The problems that could occur are endless. Another similar disadvantage that is related to record keeping is you must perform a yearly non-discrimination test. This test is run to make sure that your 401(k) plan does not discriminate in any way at all. There are also some disadvantages to the employee. These disadvantages must be looked over before deciding whether or not to take part in investing in a 401(k) plan.

Another disadvantage to 401(k) is the employee's inability to spend the money they have invested in the plan. Money can be withdrawn from the account, but one must have a hardship to make a withdrawal (i.e., a death of spouse, or on the verge of losing ones home). The reason one considers this to be a disadvantage is because of the investors inability to have full control over his or her investments. This is compared to an employee who opted not to invest in a 401(k), but rather to take it upon him or herself to invest in stocks and bond. By doing so, that individual could have access to that money at any point in time, as compared to only being able to withdraw money from a 401(k) at the age of 59 and 1/2, or in cause of hardship (www.401k.com).

Many companies offer benefits to decrease turnover rates. According to a survey done by http://www.thomas-staffing.com, around 30% of most companies offer attractive benefit packages so they can reduce employee turnover*. The vesting option of a 401(k) can reduce expensive turnover and save the company money because they will not have to retrain and recruit applicants (www.thomas-staffing.com).

Employee Contributions ($) $0 $1,350 $2,700

affordable deductions. 401(k)s make saving convenient because the money comes