Employer Sponsored Plan Advantages & Disadvantages
401(k)
Advantages
- The participant is full vested in elective deferrals at all times.
- Same tax deduction and deferral of income advantage as a traditional IRA
- An employee can designate some or all elective deferrals as Roth (not excluded from income) that are generally subject to the same taxation under the Roth IRA rules.
- The maximum contribution allowed is generally greater than an IRA.
- Elective deferral limits are greater than SIMPLE IRAs.
- Employers often match dollar-for-dollar employee elective deferrals up to certain percentages, providing employees incentives to participate in the retirement plan.
- Elective deferrals through payroll withholding make it easier for employees to save for retirement.
401(k)
Disadvantages
- Complexity and restrictions placed on highly compensated employees make it difficult and sometimes expensive to administer.
- Key employees do not always receive the full benefit of allowable elective deferrals. These restrictions may not apply to certain safe harbor 401(k) plans.
403(b)
Advantages
- The participant is fully vested in elective deferrals at all times.
- Same tax deduction and deferral of income advantage as a traditional IRA.
- An employee can designate some or all elective deferrals as Roth (not excluded from income) that are generally subject to the same taxation under the Roth IRA rules.
- Elective deferral limits greater than SIMPLE IRAs.
- Employers often match dollar-for-dollar employee elective deferrals up to certain percentages, providing employees incentives to participate in the retirement plan.
- Elective deferrals through payroll withholding make it easier for employees to save for retirement.
403(b)
Disadvantages
- Limited as to what types of employers are eligible to offer a 403(b) plan to employees. Generally available only for employees of certain tax-exempt organizations
Cash Balance Plan
Advantages
- Cash Balance Plans offer guaranteed pension benefits for employees
- These plans can offer unique incentives to attract and retain employees.
- Your business has some flexibility with its contributions to hypothetical accounts.
- These plans have higher limits on contributions.
- Cash Balance Plans allow more portability to employees that are fully vested.
- The plan can be less difficult to maintain than other retirement plans.
Cash Balance Plan
Disadvantages
- Record-keeping costs associated with cash balance plans may be higher than with a traditional pension plan.
- Growth rates are set low and conservative allowing limited growth.
- A cash balance plan is not always more cost-efficient than a traditional pension plan, so it is best to consult with a retirement specialist as to whether a cash balance plan will save you more money compared to a traditional pension plan or other retirement plans.