Despite the bad rap 401K plans have gotten recently, statistics show that the matching contribution is gradually returning, and will go back to what it used to be if the economy continues its recovery. Although 401K payouts are currently meager due to factors like low employer contributions, it can still be a good source of income for retirement.
Ideally, an employee's regular contributions (from age 30 to 62) to a balanced 401K can result in 60% of his or her pre-retirement income. Of course, this percentage is based on increased contribution as the employee moves up the income brackets, employer contribution matches of 50 cents per dollar to a maximum of 6%, and stable market conditions. Other research has found that contributions need to be at 15% for employees to see these results.
The Center for Retirement Research also researched on the cost of auto-enrolment to the employer. The expenses that the employer covers for auto-enrolment may increase twofold if he or she allows workers to fully participate. The company's matching contributions will also increase, making this process an expensive effort. However, the employer doesn't cover these expenses for nothing - he or she also gets benefits.
Employers usually have higher chances of passing the nondiscrimination test, which is designed to keep generously compensated employees from being the only participants in a company sponsored qualified plan. Nondiscrimination also works better with greater employee participation, which decreases the likelihood of violations. Employers can also use the auto-enrolment process as a different type of incentive, or even a tool to screen promising workers. Workers who actively participate in 401K tend to be planners who, in turn, make more effective long-term employees - the worker's use of 401K can indicate his focus on the future of the plan, as well as the future of the company he or she works for.
The 401K plan can be beneficial to employers and employees alike. Employees can get good money for retirement from their 401K based on their matching contributions and length of participation. Employers also get benefits, such as the nondiscrimination test and the 401K as an inadvertent tool to strengthen a company's workforce.