What Are the Disadvantages of a 401(k) for the Employer?

by Kathy Adams McIntosh

Many companies implement 401(k) retirement plans as benefits for their employees. These plans offer employees the chance to contribute toward their own retirement during their working years. Employees also enjoy reduced income taxes while contributing to the plan. The employer benefits from the reputation of offering retirement benefits. More applicants apply for jobs at these companies creating a larger applicant pool for the company to choose from. Employers also incur several disadvantages from offering 401(k) plans.

Administrative Costs

One disadvantage employers incur from offering 401(k) plans involve the administrative costs necessary to manage the plan. Employers contract with outside firms to administer the plan. The employer pays the firm a base amount and a rate per employee. In exchange, the firm manages each employee’s retirement selection. This includes providing various fund selections for the employees, updating the value of each employee’s account and handling employee withdrawals.

Pressure To Match

Another disadvantage of offering these plans considers the desire of employees to receive company matches. A company match refers to money the company contributes toward each employee’s retirement. The company expresses this match as a percentage of the employee’s contribution. Companies face pressure to offer a match when other companies in the same region offer matches.

Employee Questions

Employers who offer 401(k) plans often spend time fielding employee questions regarding the plan, another disadvantage. These questions include how to qualify for withdrawal or how to change their fund selection. Human resource employees often lack the expertise of specific funds or plan specific options and need to redirect the employee to the plan administrator. This takes up the human resource employee’s time and costs the company money as it pays the employee to respond to these questions.

Vendor Selection

Employers who offer 401(k) plans need to select a vendor to administer the plan. This represents another disadvantage. The company needs to spend time and money researching various plan administrators, meeting with them and deciding the company with which to contract. The company needs to choose an administrator who responds to employee questions and makes profitable investment choices.

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