How Does a 401(k) Compare With Other Retirement Plans?

There are several types of retirement plans that employers can provide, but 401(k)s are one of the most popular.

Other employer-sponsored retirement plans include SIMPLEs, SEPs, and various kinds of defined benefit plans. SIMPLE IRAs are sometimes called SIMPLE 401(k)s, because they operate under the same laws as Safe Harbor 401(k)s. They both are primarily employee-funded, and have rigid standards for employer contributions.

SIMPLEs cost less to set up and maintain, in general, but they do not allow for as many contributions. They also cannot be combined with a profit-sharing plan the way that 401(k)s can.

SEPs are entirely employer-funded, and do not allow any employee contributions. Combining a Safe Harbor 401(k) with a non-discriminating profit-sharing plan is like combining a SIMPLE and a SEP.

In a SEP, employers must contribute the same percentage of compensation to each employee’s account. Profit-sharing plans have more flexibility and can discriminate using a few accepted criteria. Defined benefit plans could be a traditional pension or salary continuation plan, among other forms.

These use calculations based on current salary or elective deferred compensation amounts, and apply a discount rate to determine the exact benefit they will receive in retirement. These require rigorous auditing and oversight that is usually more expensive than a 401(k) plan, and employees do not have any market upside potential.

401(k)s are highly customizable, and it is easy to see why they are a popular choice for employers.