Executive Overview of the 401 (k) Plan

In the United States, the 401(k) scheme is one of the most common employer-sponsored retirement programs. A significant percentage of employees depend on the funds invested under the 401 (k) plans to fund their retirement. Simultaneously, companies use the service to distribute business stock to their employees. The 401 (k) plan is an agreement that requires an individual to choose between receiving cash as salary or deferring a portion of it to a 401 (k) account established under the plan (Smith, 2013). The deferred balance is usually not taxable until it is passed to the owner.

Background Information

In 1978, Congress has approved the Revenue Act which included a section 401 (k) providing employees with a tax free method due to which they could differentiate their compensation from stock options of bonuses. The plan was put to effect on 1st January 1980. A benefits consultant at Johnson Companies found the law to be a great opportunity for creating a tax advantaged saving plan for staff. In 1981, the IRS issued certain rules that allowed employees to have their programs for 401 (k). Hence, in the early 1980s, this measure was put in place through salary deductions which resulted in comprehensive spreading of the 401 (k) arrangements. In 1983 about 50% of the large firms considered to offer a 401 (k) plan to their personnel (Butler, 2012).

Most organizations preferred the mentioned outline given it was cheaper and more predictable from the perspective of funding compared to pension payment. In turn, the employees were attracted by the new saving plan that would put them at a better position after retirement. In 1996, the amount of assets in 401 (k) plans was more than $1 trillion with the number of active participants totaling up to 30 million. Over the year 2001, the Tax Relief and Economic Growth Reconciliation Act led to various changes in the 401 (k) plan (Smith, 2013). As a result of the new regulation, the sum of money contributed by companies and individuals to their respective accounts significantly increased. Currently, 401 (k) plans amount more than $4.8 trillion.

Implications for Employers, Employees, and Other Stakeholders

The 401 (k) plans enables both the employee and the employer to save the pre-tax money for retirements so that individuals can let their finances grow until the time they need them. A well structured 401 (k) plan increases the employee’s retention and moral (Benna & Newmann, 2013).

Irrespective of given benefits, about 70% of small businesses do not offer 401 (k) plans to their personnel. Another thing, the saver’s credit that comes along with the mentioned outline encourages the employees to make arrangements for their retirement period better than they would do with any other plans. Another implication of the plan is that it helps employers retain their workers for a longer period and hence minimize the rate of turnover. This action allows business to have experienced and well trained employees contributing to a higher level of productivity (Munnell & Sunden, 2014). In terms of the other stakeholders such as suppliers and lenders, they also benefit from the plan numerous ways. For instance, as the level of business risks reduces due to the result of the plan, lenders increase their trust towards the company and hence, offer the required services with less uncertainty. Therefore, the lenders benefit from provide more credit which adds to their level of assets.

Besides the advantages, there are certain problems associated with plans. Most of employees may find the differentiating tax through the 401 (k) outlines to be a bad idea in case of increased tax rates (Nicholson, 2015). At the same time, a large number of investors may be frustrated by their inability to make a maximum use of their savings without incurring the cost of heavy penalty. At the same time, participants are restricted by the level of annual savings allowed under the plan. In instances the employees become disabled or are forced to stop working, their plans become automatically terminated (Munnell & Sunden, 2014).

Recommended Resolutions

First of all, those responsible for formulating and implementing the regulations should consider the interests of the workers as much as they try to benefit from the plan. This measure can be taken by letting staff participate in the law resolution activities. In turn, employees should be allowed to offer their ideas, comments, and complaints concerning the given program. The personnel must be provided with sufficient knowledge and information concerning the plan before they enroll to it. As above explained, most of the workers are only aware of the positive attributes without getting to know anything concerning the negative features of the arrangement. It is important for the staff to have a clear understanding of the plan characteristics as they participate in it. Moreover, most of personnel completely rely on the plan for their retirement years.

References

Benna, T., & Newmann, B. W. (2013). 401(k)s for dummies. New York, NY: Wiley Pub.

Butler, S. J. (2012). The decision-makers guide to 401(k) plans: How to set up cost-effective plans in companies of all sizes. San Francisco: Berrett-Koehler.

Munnell, A. H., & Sunden, A. E. (2014). Coming up short: The challenge of 401(k) plans. Washington, D.C: Brookings Institution Press.

Nicholson, L. A. (2015). 401(k) plans. Washington, D.C: Bureau of National Affairs.

Smith, M. X. (2013). Managing your firm’s 401(k) plan: A complete roadmap to managing today’s retirement plans. Hoboken, N.J: Wiley.