401(k) vs. Other Retirement Plans: An Administrator’s Perspective

Introduction: Why Choosing the Right Retirement Plan Matters

As a retirement plan administrator, your responsibility is to offer retirement options that align with employees’ needs and ensure regulatory compliance. With various retirement plans available, each with its own set of benefits, tax advantages, and requirements, understanding the nuances of each is crucial. In this article, we’ll explore the 401(k) plan and compare it with other popular retirement options, providing an administrator’s perspective on selecting the right plan for a well-rounded benefits package.

1. The 401(k) Plan: A Go-To for Employer-Sponsored Retirement Plans

The 401(k) is one of the most widely adopted retirement plans, and for good reason. Here are some of the features that make it a top choice for employers:

• High Contribution Limits: In 2024, employees can contribute up to $23,000, with an additional $7,500 for those aged 50 or older. Employers can contribute as well, allowing for a total contribution of up to $66,000.
• Tax Benefits: Employee contributions are made pre-tax, reducing taxable income. Additionally, employers’ contributions are tax-deductible.
• Employer Match Flexibility: Employers can choose to offer a matching contribution, incentivizing participation without the mandatory requirements of other plans.

While the 401(k) is a great option, it may not suit every business structure or employee demographic. Next, let’s look at alternative retirement options to understand how they compare.

2. The SIMPLE IRA: A Solution for Small Businesses

The SIMPLE IRA is specifically designed for small businesses with 100 or fewer employees, offering a simpler and cost-effective alternative to the 401(k):

• Lower Contribution Limits: SIMPLE IRA contributions are capped at $15,500, with an additional catch-up contribution of $3,500 for those over 50.
• Mandatory Employer Contributions: Employers must either match employee contributions up to 3% of their salary or contribute a flat 2% for each eligible employee, regardless of their participation.
• Fewer Administrative Requirements: SIMPLE IRAs have minimal reporting and compliance requirements, making them easy to manage.

The SIMPLE IRA is a streamlined option for smaller businesses that want to offer retirement benefits but lack the resources for a more complex 401(k) plan.

3. SEP IRA: Ideal for Self-Employed Individuals and Small Business Owners

A SEP IRA is often chosen by self-employed individuals or small business owners due to its flexibility and high contribution potential:

• High Contribution Limits for Employers: Employers can contribute up to 25% of an employee’s compensation or $66,000, whichever is less. Employees, however, cannot contribute.
• Employer Contributions Only: In a SEP IRA, only employers contribute, providing a straightforward structure but limited options for employee contributions.
• Tax Benefits and Flexibility: Contributions are tax-deductible for the business, and employers can choose to adjust their contributions year-to-year based on profitability.

While SEP IRAs offer simplicity and flexibility, they are often less attractive to employees who may prefer plans allowing for personal contributions.

4. Roth IRA: A Supplementary Option for After-Tax Savings

Though typically not offered by employers, a Roth IRA is a valuable option for employees to save after-tax income:

• After-Tax Contributions: Contributions are made with after-tax dollars, allowing for tax-free growth and tax-free withdrawals in retirement.
• Income Restrictions: In 2024, eligibility phases out for individuals earning over $153,000 (single) or $228,000 (married filing jointly).
• Lower Contribution Limits: Contributions are capped at $6,500 per year, with a $1,000 catch-up for individuals over 50.

Roth IRAs are popular among employees for supplementing retirement savings, especially for those who anticipate being in a higher tax bracket in retirement.

5. Comparing Key Factors: Contribution Limits, Tax Benefits, and Administration

When evaluating retirement plans, consider how each aligns with your business goals, employee demographics, and administrative capacity. Below is a summary of how the 401(k) stacks up against other options:

By understanding the unique features of each plan, administrators can better assess which retirement options fit the business’s needs and ensure maximum value for employees.

6. Aligning Plan Choices with Fiduciary Responsibilities

As a retirement plan administrator, you have a fiduciary responsibility to act in the best interest of plan participants. Ensuring that fees are reasonable, investments are managed prudently, and communication is transparent are essential parts of this role. Here’s how fiduciary responsibilities play out across different plan types:

• 401(k) Fiduciary Duties: In a 401(k) plan, the administrator must monitor investments, manage fees, and ensure regular compliance testing, which can require time and expertise.
• SIMPLE IRA and SEP IRA: These plans have fewer fiduciary requirements, as investment options and contributions are straightforward, making them less resource-intensive to manage.

Choosing a retirement plan that aligns with your fiduciary capacity helps you remain compliant and provide a valuable benefit to employees.

7. Consider a Multi-Plan Approach for Greater Flexibility

In some cases, a combination of plans may be the best approach. For instance, an employer could offer a 401(k) alongside a Roth IRA option, allowing employees to diversify their retirement savings with both pre-tax and after-tax options. A multi-plan strategy can offer more flexibility and appeal, especially for diverse workforces with varying income levels and savings preferences.

Final Thoughts: Choosing the Best Plan for Your Business

Selecting the right retirement plan goes beyond compliance—it’s about building a benefits package that enhances employee satisfaction and aligns with your company’s long-term financial goals. While the 401(k) is often the most versatile, alternative options like the SIMPLE IRA and SEP IRA can provide valuable benefits to smaller businesses with limited administrative resources.

By understanding the advantages and limitations of each plan, administrators can make informed decisions that best support both the organization and its employees in reaching retirement readiness.

Global View Capital Management (GVCM) is an affiliate of Global View Capital Advisors (GVCA). GVCM is a SEC Registered Investment Advisory firm headquartered at N14W23833 Stone Ridge Drive, Suite 350, Waukesha, WI 53188-1126. 262.650.1030. Ryan Peca is an Investment Adviser Representative (“Adviser”) with GVCM. Additional information can be found at www.adviserinfo.sec.gov Global View Capital Insurance Services (GVCI) is an affiliate of Global View Capital Advisors (GVCA). GVCI services offered through Experior Financial Group, ASH Brokerage, and/or PKS Financial. GVCI is headquartered at N14W23833 Stone Ridge Drive, Suite 350, Waukesha, WI 53188-1126. 262-650-1030. Ryan Peca is an Insurance Agent of GVCI.

These views do not necessarily represent the views of GVCM or any of its affiliates. Investment involves risk.