Shared Success: The Top 401(k) Advantages for Employers and Employees

Quick look: The 401(k) is the most widely offered retirement plan in the United States. While employees clearly benefit, these accounts also offer significant advantages for business leaders. This National 401(k) Day, we break down how they help small and midsized employers increase retention, attract top talent, and potentially reduce tax liability, and how a professional employer organization (PEO) can make it easier to experience those perks.

For many, retirement planning starts with a 401(k), the most common employer-sponsored defined contribution (DC) plan in the United States.

401(k) accounts help staff grow their nest egg faster than a traditional savings account while preparing for a secure and comfortable retirement. At the same time, offering a 401(k) enables employers to better recruit and retain top talent, and may even reduce tax liability.

401(k) accounts at a glance

While you may already be familiar with 401(k) plans, staying informed on current trends and best practices can help your business maximize their impact, for both employees and your bottom line.

In honor of National 401(k) Day, here’s a look at how 401(k)s work, participation rates by generation, and employees’ motivations for choosing to invest in these plans.

What is a 401(k)?

According to the IRS, “A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.”

There are two types of 401(k) accounts, a traditional 401(k) and a Roth 401(k):

• Traditional 401(k): Employees’ elective salary deferrals are excluded from their taxable income. When traditional 401(k) funds are withdrawn in retirement, the withdrawals are taxed as ordinary income, meaning income tax must be paid on original contributions and earnings.
• Roth 401(k): Since after-tax dollars fund Roth 401(k)s, retirement withdrawals, including contributions and earnings, are tax-free.

Employers may also contribute to their staff’s accounts, whether they’re traditional 401(k)s or Roth 401(k)s.

How much can be contributed to a 401(k)?

The IRS sets a maximum contribution limit for 401(k) accounts each year. In 2025, the limit is $23,500.

According to the Investment Company Institute (ICI), Americans held $10.6 trillion in DC plans at the end of 2023. These funds accounted for almost 30% of the nation’s $38.3 trillion in retirement assets and approximately 9% of household financial assets.

401(k) demographics: Who’s contributing?

The ICI reported the following age breakdown of 401(k) participants:

• 20s or 30s: 40% of participants
• 40s: 23% of participants
• 50s: 23% of participants
• 60s: 14% of participants

The data also included the annual household income of account holders:

• Less than $25,000: 5% of participants
• $25,000-$99,999: 43% of participants
• $100,000+: 52% of participants

Further, the ICI found that 90% of 401(k) plan participants received employer contributions.

401(k) benefits for employees

Employer-sponsored retirement accounts are highly valued by participants, with the majority reporting strong satisfaction. The ICI research revealed that:

• 88% agreed that their plans helped them “think about the long term, not just my current needs.”
• 87% agreed that “payroll deduction makes it easier for me to save.”
• 84% agreed their plan “offers me a good lineup of investment options.”
• 82% agreed that “the tax treatment of my retirement plan is a big incentive to contribute.”
• 80% agreed that “knowing that I’m saving from every paycheck makes me less worried about the short-term performance of my investments.”

401(k) benefits for employers

While 401(k)s are a valuable benefit for employees, they also offer significant advantages for small and medium-sized employers:

1. Increased employee retention

A recent study has confirmed that 401(k) plans are proven retention tools.

The report found that providing a retirement plan can help SMBs save more than $100,000 in turnover costs each year, a 2x return on the initial cost of offering a 401(k). This makes sense when considering that recruiting and onboarding a replacement employee costs about $4,700 per hire.

Not including a 401(k) plan in their benefit offerings can put employers at a competitive disadvantage. Forbes reports that 62% of workers consider the availability of a retirement plan when deciding whether to accept or remain in a job, and 76% are likely to be attracted to companies that care more about their financial well-being.

2. More effective recruitment (especially of younger talent)

Offering a 401(k) helps SMBs attract top talent, even when competing with larger companies. Research from Voya Financial shows that 98% of employees feel that it’s extremely important for organizations to offer an employer-sponsored retirement savings plan.

Even though they’re farther from retirement, younger employees still prioritize planning for their future. Gen Z contributes to their 401(k) plans at an earlier age than Millennials did. Further, Charles Schwab highlighted their commitment to financial wellness in its 2025 Modern Wealth Survey:

• 57% of Gen Z reports they are financially comfortable or on track to be, compared to 54% of Millennials, 45% of Gen X, and 39% of Baby Boomers
• 39% of Gen Z have documented their financial goals in a formal plan, compared to 36% of Millennials, 27% of Gen X, and 26% of Baby Boomers
• 43% of Gen Z believe they are on track to be or already wealthy, compared to 42% of Millennials, 33% of Gen X, and 20% of Baby Boomers

3. Unlock tax incentives

For businesses, offering a 401(k) can also mean valuable tax savings.

Signed into law in 2019, the SECURE Act aims to help SMBs provide workers with less expensive and easy-to-manage “safe harbor” retirement plans. One way the Act does this is by increasing the business tax credits available to businesses establishing 401(k) plans for the first time.

Before the Act was established, the business tax credit for the first three years of an employee 401(k) plan equaled 50% of qualified startup costs (not exceeding $500). This number has since increased tenfold for organizations employing between one and 100 workers.

The SECURE Act also states that businesses that match 401(k) contributions for employees may qualify these as tax-deductible business expenses, further reducing their tax liability.

Business owners should note that the SECURE 2.0 Act expanded upon these changes, allowing for:

• Enhanced tax credits for SMBs setting up retirement savings for employees
• The opportunity for companies to match contributions to employee retirement savings accounts based on their workers’ student loan payments
• An increase in catch-up contributions for older workers
• Qualification of part-time workers for employer retirement plans

The SECURE 2.0 Act also requires businesses offering 401(k) and 403(b) plans to automatically enroll eligible staff, provide a contribution rate of at least 3%, and automatically increase the initial contribution rate by 1% each year until it reaches at least 10% of pay. Employees may opt out of these allocations.

Click here to view the complete SECURE 2.0 Act >>

Take your benefits package to the next level

401(k)s are valuable for both employees and employers, but managing them isn’t always straightforward. Business leaders must navigate plan selection, administration, and compliance, while also addressing company culture, growth priorities, and other objectives.

A professional employer organization (PEO), like ExtensisHR, can help.

ExtensisHR’s employee benefits team brings deep expertise in benefits administration and management, helping SMBs attract and retain employees of all ages.

ExtensisHR also offers a comprehensive suite of multigenerational benefits, including:

• 401(k) retirement plans and financial planning services
• Medical, dental, and vision insurance with telehealth coverage
• Student loan repayment programs
• Supplemental insurance (i.e., accident insurance, critical illness insurance, and hospital indemnity insurance)
• Family-building support
• Pet insurance
• And more

The right benefits do more than reward employees; they boost engagement, loyalty, and company performance. ExtensisHR makes it easy for business leaders to offer plans that appeal to a diverse workforce while reducing administrative stress.

Ready to give your team a head start on their future and enjoy the perks of offering a 401(k)? Explore ExtensisHR’s employee benefits solutions, or contact us to learn more about working together.