Three Reasons to Sponsor a 401(k) Plan

Employers have much to consider when choosing to sponsor a 401k plan. Fees, testing, investments, administration, plan design, notices, and participant education all require detailed attention. But why would an employer choose to sponsor a plan? There are only three reasons:

  • To provide an employee fringe benefit in order to attract and retain personnel
  • To put away money for business owners tax deferred
  • The company does prevailing wage work

The specifics of the plan, which include items such as eligibility, vesting, time to entry, money sources, distribution options, and other details, are determined based upon the reason for the plan itself. Not all plans should be created alike, as each company’s reasons for having a plan will certainly vary.

Consider the following examples, and the reason each company might choose to sponsor a 401(k) plan:


Specifics: 104 employees, 60% of work is prevailing wage (Davis Bacon (DBA/DBRA), Service Contract (SCA), state prevailing wage)

Here, the company’s primary objective may be to save the wage related burden on the prevailing wage required fringe.

The company may also be interested in maximizing contributions for business owners, but this is not the owner’s primary purpose in instituting a plan. The company may also want to use the plan as a fringe benefit to attract and retain personnel, especially for certain trades, foremen, or superintendents. Because of prevailing wage, the company’s 401k plan is just one piece of their fringe benefit program.


Small manufacturing facility

Specifics: 182 employees, hard to find and keep good personnel

This company’s primary objective may be to have a tool it can use to attract and retain key personnel to differentiate them from their competitors.

The business owners want to take advantage of putting money back for themselves as well, but only if it is in the best interest of the company.

The company doesn’t do prevailing wage work, so this is not of concern, but does compete for the same local labor pool with its competitors. It may want to use the 401(k) plan as a differentiator in attracting qualified employees.


Dentist office

Specifics: highly paid, 5 employees

For this company, the primary objective may be to put away as much money for the business owner as possible, while also providing an employee fringe benefit that will help attract and retain employees.

The business owner desires the flexibility to reward certain employees through the plan if possible but does not want to be obligated to do so.



Whether an existing plan or a new plan, what each company is trying to accomplish should be at the forefront when determining appropriate plan design. Each company’s unique business circumstance, and the level of importance placed on the three reasons to sponsor a plan, determine best fit.

There simply is no “one size fits all” 401(k) plan.