Benefits of setting up a retirement plan

A business is only as strong as the people behind it. And people, no matter how dedicated, don’t just work for today. They work for a future they can count on. A retirement plan helps turn that future into something real – something employees can confidently build toward.

Yet, too many workers delay retirement planning, unsure of where to start or worried they can’t afford to save. Businesses have the power to change that. A well-structured retirement plan is a benefit as much as it’s a driver of employee engagement and a competitive advantage in today’s job market. Offering one can give employees the security they need to do their best work.

What is an employee retirement plan?

Retirement might seem like a distant dream for employees buried in deadlines and meetings, but wise employers know it’s a reality that needs planning – and that needs to happen today. An employee retirement plan is a structured savings program that helps workers set aside money for their future, often with employer contributions sweetening the deal.

Employers don’t just offer these plans out of generosity (though that’s a nice bonus). They’re a strategic tool that helps businesses attract and retain top talent while providing employees with a clear path to long-term financial security.

Here’s a look at some examples of retirement plans:

401(k) plans

A cornerstone of workplace benefits, 401(k) plans empower employees with tax-deferred growth and the opportunity to earn employer-matching contributions.

Roth 401(k)

Roth 401(k)s are similar to a traditional 401(k), except employee contributions are taxed upfront, meaning withdrawals are tax-free in retirement, as are earnings if certain conditions are met¹.

SIMPLE individual retirement account (IRA) plans

Designed for small businesses, offering lower administrative costs and employer contributions.

SEP IRA

A favorite for the self-employed and small business owners who want to contribute generously to their own (and their employees’) retirement

Without a formal retirement plan, employees must navigate the unpredictable world of personal finance alone. That’s a daunting process, and many people are unsure how much to save or where to invest. A well-designed plan provides structure and encourages consistent saving habits that turn financial security into a reality rather than a distant hope.

The equation is simple: invest in a retirement plan, and you’re not just helping secure your employees’ futures. You’re also working towards securing the long-term success of your business.

How do employee retirement plans work?

Employee retirement plans follow a structured system of contributions, tax benefits and legal requirements that help both employees and businesses build long-term financial security.

Employees contribute a portion of their paycheck, either pretax (traditional plans) or post-tax (Roth plans), to grow their savings. Many employers match these contributions entirely or up to a set percentage, providing an extra boost. 

Some plans, like safe harbor 401(k)s, require employer contributions but come with compliance benefits. Others, like traditional 401(k)s, offer more flexibility but require annual testing to ensure fairness.

Tax advantages make these plans even more valuable. Employees in traditional plans lower their taxable income today and defer taxes until retirement. In contrast, Roth plan holders pay taxes on their employee contributions upfront but enjoy tax-free withdrawals later if certain conditions are met1. Businesses also benefit because employer contributions are tax-deductible, and companies can qualify for tax credits when setting up new plans.

Not all employer contributions are immediately available to employees. Vesting schedules determine when workers gain full ownership of employer contributions, encouraging retention. Some companies offer immediate vesting, while others use cliff or graded vesting to distribute ownership over time.

And, of course, businesses must follow compliance rules required under the Internal Revenue Code (IRC) and Employee Retirement Income Security Act (ERISA) so retirement plans are fair and legally compliant. 

Why should employers set up a retirement plan, and what are some of the benefits?

A retirement plan is a strategic investment in a business and its employees, with specific advantages for each.

Business benefits

A competitive benefits package can reduce turnover, saving businesses from the high costs of hiring and training new talent. It also provides financial advantages for the company, making it a cost-effective way to invest in employees.

Retirement incentives for businesses at a glance:

• Attracts and retains top talent by offering long-term financial security.
• Reduces tax liability through deductible employer contributions.
• Qualifies for tax credits when starting a new retirement plan.
• Simplifies compliance with Safe Harbor 401(k) options.
• Boosts employee engagement by fostering financial wellness.

Employee benefits

A retirement plan offers employees more than just a place to save money. It provides a clear path to long-term financial security, reducing stress about the future. 

With automatic payroll deductions and employer-matching contributions, saving for retirement becomes effortless. Employees also benefit from tax advantages, whether by lowering taxable income today or enjoying tax-free withdrawals later.

Retirement incentives for employee at a glance:

• Provides financial security and peace of mind.
• Accelerates wealth accumulation through employer-matching contributions.
• Simplifies retirement planning with automated payroll deductions.

What are the first steps to learning about and setting up a retirement plan?

Setting up a retirement plan starts with understanding the business’s needs and choosing the right structure. Factors like company size, employee demographics and budget all play a role in selecting the best option.

A strong plan balances competitive benefits with compliance and cost management.

Step #1: Identify business objectives and workforce needs

Before selecting a plan, employers should assess company goals and employee expectations. A growing business may prioritize flexibility, while an established company may focus on retention. Knowing the workforce demographics helps determine the best approach.

• Evaluate workforce needs to align benefits with employee expectations.
• Consider retention goals when choosing features that attract top talent.
• Assess budget constraints to determine employer contributions.

Step #2: Choose a plan type: Traditional 401(k) vs. safe harbor

A traditional 401(k) offers flexibility but requires annual compliance testing. A safe harbor 401(k) simplifies compliance by requiring set employer contributions. Other options, like SIMPLE IRAs and SEP IRAs, may work better for small businesses.

• Traditional 401(k) (which can allow for Roth or post-tax employee contributions): Flexible contributions but compliance testing is required
• Safe harbor 401(k): Avoids testing with required employer contributions
• Other options: SIMPLE IRAs and SEP IRAs

Step #3: Consult financial advisors and plan providers

Choosing the right plan can be complex, so working with an expert ensures the best fit. Financial advisors and plan providers help with investment options, compliance and administration.

• Work with an advisor to select the right structure.
• Choose a provider that offers strong administrative support.
• Confirm investment options align with employee needs.

Step #4: Understand contribution limits and legal requirements

The IRS requires businesses to meet legal standards applicable to retirement plans. Employers must know these rules to avoid penalties and ensure the plan operates smoothly.

• Follow IRS contribution limits.
• Fund required employer contributions.
• Conduct any required compliance testing and tax reporting.

What are the stages of sponsoring a retirement plan?

Setting up a retirement plan isn’t just about picking an option and calling it a day. It’s a process that unfolds in stages, from selecting the right plan to making it work for your team.

Choosing the right plan is only the beginning. Employers must also establish the plan’s structure, educate employees, maintain compliance, and, if necessary, handle termination properly.

Choosing the right plan

Every business has different needs, so selecting the right retirement plan depends on company size, budget and workforce demographics. The most common options of employer-sponsored retirement plans include:

• 401(k) plans (traditional and safe harbor): Flexible employer contributions with tax advantages; safe harbor plans eliminate certain compliance testing. If the plan allows employee Roth contributions, these contributions are taxed upfront, and earnings are withdrawn tax-free in retirement if certain conditions are met¹.
• SIMPLE IRA plans: A streamlined option for small businesses with 100 or fewer employees, requiring mandatory employer contributions.
• Simplified Employee Pension (SEP) IRA: Designed for self-employed individuals and small businesses; offers high contribution limits.

Establishing the plan

Once the right plan is in place, it’s time to bring it to life. That means setting up contributions, enrolling employees and integrating payroll deductions so everything runs smoothly. 

Clear communication is key. Employees must know how the plan works, what’s in it for them and how to start contributing. They also need to understand why retirement planning and saving for the future is important. Employers, meanwhile, must follow applicable tax and compliance rules.

Operating the plan

A retirement plan isn’t a set-it-and-forget-it benefit. It needs ongoing management to keep employees engaged and contributions flowing. 

Responsibilities include keeping up with legal requirements for maintaining the plan, ensuring investment options stay competitive and educating employees on how to make the most of their savings. Annual plan reviews help businesses stay on top of any updates or changes in compliance and legal requirements, preventing problems before they start.

Terminating a plan (if necessary)

Not every plan lasts forever. Sometimes, businesses need to transition to a different option or close a plan entirely. 

When that happens, employers must handle the process carefully to help keep everyone on track for retirement. They need to file the right paperwork, wrap up contributions and notify employees so they can take any required distributions. Legal and tax considerations also come into play.

Secure your business’s and employees’ future with a retirement plan

Don’t consider a retirement plan as merely numbers on a balance sheet. Instead, think of it as a promise, a vision – a way of saying that the work being done today has lasting value. Businesses that invest in their employees’ futures don’t just build strong teams. They also build trust, loyalty and a culture where people feel supported at every stage of their careers.

But offering a retirement plan isn’t just about having one. It’s about choosing the right one, managing it well and ensuring it works for the company and its employees. That takes expertise, strategy, and a partner that understands the complexities of retirement planning.

ADP provides the tools, knowledge and support to help businesses design and manage plans that fit their goals. Whether setting up a plan for the first time or refining an existing one, ADP simplifies the process. We help employers support compliance and provide the tools for long-term success.

Your employees are building their futures. Give them the right tools to do it. Talk to an ADP retirement specialist today.

¹ Distributions are tax-free provided you had your Roth account for at least five years, and you are at least 59½ or are disabled or deceased.

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Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan’s provisions or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor.

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