Shared Wins: The Top 401(k) Benefits for Employers and Employees

Quick look: National 401(k) Day is a good reminder of why employer-sponsored retirement plans matter, both for the employees building long-term financial security and for the businesses offering them. Here’s how a 401(k) can help your company strengthen its retention and recruiting and potentially take advantage of tax incentives.

When most people think about retirement planning, they think about a 401(k). It remains the most common employer-sponsored plan in the country and offers a convenient way for employees to save for the future, often with help from their employer.

But what gets far less attention are the ways these accounts benefit employers themselves: they offer a recruiting and retention advantage and a way to reduce tax liability.

It’s a benefit that can create a win for everyone.

All about the 401(k)

You’re likely already familiar with 401(k) plans, but contribution limits and participation patterns shift each year, and the incentives for offering a plan keep expanding.

In honor of National 401(k) Day, here’s an updated look at how these plans work, who’s participating, and why they continue to be an important part of a competitive benefits strategy.

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 main versions: a traditional 401(k) and a Roth 401(k).

• Traditional 401(k): Employees’ contributions come out of their paycheck before taxes, which lowers their taxable income now. In retirement, withdrawals, including both contributions and earnings, are taxed as ordinary income.
• Roth 401(k): Contributions are made with after-tax dollars, so qualified withdrawals in retirement, including earnings, come out tax-free.

Employers can contribute to either account type on behalf of their staff.

How much can employees contribute to a 401(k)?

The IRS adjusts 401(k) contribution limits annually to keep pace with inflation. For 2026, the limit climbed to $24,500, up from $23,500 in 2025.

Those contributions add up quickly. As of mid-2026, Americans held $9.9 trillion in 401(k) plans, according to the Investment Company Institute (ICI). Retirement savings rolled over from 401(k)s and similar workplace plans also make up about half of the $19 trillion held in individual retirement accounts (IRAs) today.

401(k) demographics: who’s contributing?

ICI research also breaks down 401(k) participation by age:

• 20s: 15% of participants
• 30s: 25% of participants
• 40s: 23% of participants
• 50s: 23% of participants
• 60s: 14% of participants

While savers across every income bracket participate, annual household income among account holders tends to skew upward:

• Less than $25,000: 5% of participants
• $25,000-$49,999: 12% of participants
• $50,000-$74,999: 16% of participants
• $75,000-$99,999: 15% of participants
• $100,000-$199,999: 35% of participants
• $200,000+: 17% of participants

The same research found that 90% of 401(k) participants received employer contributions.

How a 401(k) positively impacts participants

A retirement plan can make saving for the future feel much more manageable, particularly when contributions happen automatically through payroll.

ICI research found that participants strongly agree their plan helps them:

• Think about the long term instead of just current needs (88%)
• Save more easily, thanks to payroll deduction (87%)
• Access a solid lineup of investment options (84%)
• Benefit from tax treatment that makes contributing worthwhile (82%)
• Feel less anxious about short-term market swings (80%)

The business benefits of offering a 401(k) to employees

Employees clearly value what a 401(k) offers, but the advantages don’t stop there. Here are three ways these accounts benefit employers, too.

1. Stronger employee retention

Simply put, 401(k) accounts make organizations more competitive, and the data backs that up.

According to Pew Research, 89% of small employers that offer a retirement plan agree that it helps them retain workers. Further, Forbes reports that 62% of workers consider the availability of a retirement plan when deciding whether to accept or stay in a job.

There’s a financial argument for retention, too. Replacing an employee is expensive, with the average cost per hire in the U.S. now sitting at $5,475 for non-executive roles. Offering a retirement savings plan is one of many components that entice your people to stay and help you avoid unnecessary hiring spend.

2. More competitive recruiting, especially with younger talent

A 401(k) also helps small and midsized businesses (SMBs) compete for talent against much larger companies. Research from Vestwell found that 98% of employees think it’s important for their employer to provide a retirement benefit.

Despite being further away from retirement, younger employees are prioritizing their financial future earlier than previous generations did. On average, Gen Z began to save at age 20, versus age 26 for Millennials, 30 for Gen X, and 35 for Baby Boomers. Charles Schwab’s 2025 Modern Wealth Survey elaborates on these efforts:

• 57% of Gen Z say they’re financially comfortable or on track to be, compared with 54% of Millennials, 45% of Gen X, and 39% of Baby Boomers
• 39% of Gen Z have put their financial goals into a formal, written plan, compared with 36% of Millennials, 27% of Gen X, and 26% of Baby Boomers
• 43% of Gen Z believe they’re already wealthy or on track to be, compared with 42% of Millennials, 33% of Gen X, and 20% of Baby Boomers

Gen Z is expected to comprise 30% of the workforce by 2030, so benefits that support financial wellness can be an important part of the recruiting conversation.

3. Access to potential tax incentives

Offering a 401(k) can also translate into tax savings for your business.

The SECURE Act was introduced in 2019, with the goal to help SMBs offer more affordable, easier-to-manage “safe harbor” retirement plans. One of its biggest changes was expanding the tax credits available to companies establishing a 401(k) for the first time.

Before the Act, the tax credit for a new 401(k) plan’s first three years equaled 50% of qualified startup costs, and was capped at $500. That cap has since grown to $5,000 for businesses with one to 100 employees.

The SECURE Act also allows businesses that match employee 401(k) contributions to consider those matches as tax-deductible expenses, further reducing their overall tax liability.

The follow-up SECURE 2.0 Act built on these changes, adding:

• Enhanced tax credits for SMBs setting up new retirement plans
• The option for companies to match employees’ student loan payments with retirement contributions
• Higher catch-up contribution limits for older workers
• Eligibility for part-time employees to join employer retirement plans

Under SECURE 2.0, businesses offering 401(k) and 403(b) plans are also required to automatically enroll eligible employees, with an initial contribution rate of at least 3%, and raise that rate by 1% annually until it reaches at least 10% of pay. Employees can opt out of this at any time.

Take your benefits package to the next level

A 401(k) creates value for everyone involved, but offering one also comes with administrative responsibilities: plan selection, ongoing maintenance, and compliance requirements. That can be a lot for SMBs to manage alongside everything else involved in growing a business.

That’s where a professional employer organization (PEO) like ExtensisHR can help.

ExtensisHR’s employee benefits team brings deep expertise in benefits administration and offers a full suite of multigenerational benefits, including:

• 401(k) retirement plans and financial planning services
• Comprehensive medical, dental, and vision insurance
• Supplemental insurance, including accident, critical illness, and hospital indemnity coverage
• Student loan repayment programs
• Family-building support
• Pet insurance

ExtensisHR makes it possible for growing companies to offer a benefits package that appeals to a diverse workforce, without taking on the administrative weight themselves.