Is An IRA A Good 401(k) Alternative For Your Employees?

Recently my team met with an employer whose perspective challenged us to consider how we talk about the importance of 401(k). This boss offered a profit-sharing only retirement plan to her employees, meaning she made contributions on their behalf, but the employees themselves didn’t have any ability to add their own savings. She believed that her employees who wanted to grow personal savings for retirement would take the steps to get serious and open their own IRA.

So, is an IRA or 401(k) plan right for your employees? Here’s a statistic that might surprise you: Middle class workers are 15 times more likely to save for retirement at work than on their own.¹Here are three reasons why an IRA is often not a good substitute for a 401(k) plan.

1. 401(k) Plans Make It Easier To Start Saving

You might consider contributing to a 401(k) to be something of an automatic process. The money comes right out of payroll, and in plans that have auto-enrollment features employees don’t even have to sign up to get started. Contrast that with an IRA, which requires an employee to take initiative in finding a provider and setting up an account, and you’ll see why it’s far more likely people are going to save for retirement in the 401(k). It’s convenience, plain and simple. In fact, over 70% of workers earning between $30,000 and $50,000 per year will participate in a retirement plan offered through their employer, while less than 5% of that same population will save through their own IRA.²That means a majority of those employees will be underprepared for retirement without support from their employer.

2. Education And Support Are Key To Saving

With some of the automatic features I described above, it might sound like a 401(k) can be a great hands-off way to grow retirement savings, and that’s true. But that’s not to say that every participant will want the process to be hands off. In fact, 77% of employees would prefer to work for an employer who offers financial support and education alongside a retirement plan.³This is because of the confidence and optimism that comes along with understanding your retirement goals and how the current investment strategy in your 401(k) account supports them. Nearly half of people who have saved between $250,000 and $999,999 for retirement credit their employer as the top source of their education about retirement savings.⁴On the other side of the coin, consider that people who have saved nothing for retirement are most likely to get education from family and friends. In other words, it seems as though there’s a connection between saving more and having access to education through an employer. The education you as an employer can provide through partnership with a 401(k) service provider is one of the most valuable benefits of offering a 401(k) at your business.

3. 401(k) Plans Allow Employees To Save More Than Iras

Finally, 401(k) plans have the basic benefit of allowing employees to save more pre-tax money every year than an IRA does. For 2024, the IRS contribution limit for IRAs is $7,000,⁵while the limit for 401(k) plans in 2024 is $23,000 plus an extra $7,500 allowed for individuals age 50 or over.⁶Yes, every plan participant in a 401(k) has the potential to save three times more than they would be able to in an IRA. Of course not every employee will be able to save up to the max 401(k) contribution. But today’s employees likely need to be saving 10% or more of their yearly income to secure a fully-funded retirement, depending on factors like income, investment strategy, and when they start saving. 401(k) plans give employees a much more realistic route to achieving this 10% savings rate, especially if you choose to offer an employer match to help your employees save even more.

I’ve seen it time and time again: When given the chance to save in a company-sponsored retirement plan, many people will do just that. A 401(k) plan with plenty of education could be just what your employees need to start saving and preparing for the future.

¹http://usaretirement.org/

²http://usaretirement.org/

³Fisher Investments 401(k) Wellness in the Workplace Survey

⁴https://www.daveramsey.com/pr/employer-retirement-education-plays-key-role-in-long-term-financial-success

⁵https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits

⁶https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limitss