Employer-sponsored Retirement Savings Plans

Employer-sponsored retirement savings plans are specific retirement savings plans in which a company participates for the benefit of its employees. In many cases, such plans enable employees to allocate money for retirement on a pretax basis. This not only allows them to save more money than they might have otherwise but also lowers their total taxable income, thus decreasing their overall federal tax burden. Employees typically pay income tax on that income only when they withdraw it from their retirement savings plan years later. Many companies offer incentives to employees who participate in employer-sponsored retirement plans, often in the form of matching contributions. Although employers offer many types of retirement plans, some of the most common include 401(k) plans, 403(b) plans, 457(b) plans, and employee stock ownership plans (ESOPs), also referred to as stock options. Other less common plans include profit-sharing plans, pension plans, and Savings Incentive Match Plan for Employees of Small Employers individual retirement accounts (SIMPLE IRAs).

Background

Saving for retirement is widely considered to be of great importance for workers in the United States. Although some government programs exist to help retired Americans pay for essentials such as food and shelter, the continued existence and form such programs, particularly Social Security, might take in future have come under debate in the early twenty-first century. As such, many financial experts urge Americans to take a more active role in saving for retirement. One of the simplest ways to save entails enrolling in an employer-sponsored retirement savings plan, if one is available. By enrolling in a plan such as a 401(k), an employee can deposit a portion of their paycheck each pay period, without paying income tax on it. This deposit, in turn, lowers the employee’s total taxable income, thus likely lowering the federal income taxes they owe that year. The employee must pay income tax on the funds when the time comes to withdraw them; however, the years or decades spent in the retirement account will have given the total balance time to increase through investments or interest, so the employee may ultimately withdraw significantly more money than they initially deposited.

In addition to allowing for tax-deferred savings, employer-sponsored retirement savings plans sometimes allow employers to contribute funds on the employee’s behalf. This often occurs in the form of matching or partial matching of funds. For example, an employer may offer to deposit an amount of money each month equal to 3 percent of an employee’s monthly pretax income, provided the employee also deposits this amount. In profit-sharing plans, a less common form of retirement plans, the employer may contribute a portion of its yearly profits to each employee’s account, regardless of how much the individual employee has contributed. Employer contributions allow employees’ retirement savings to grow at a significantly faster rate. However, it is important to remember that funds contributed by one’s employer are rarely available right away. Rather, they typically follow a specific vesting schedule, in which portions of the funds become available in accordance with how long the employee has been with the company or enrolled in the savings plan. This prevents individuals from enrolling in a savings plan, receiving a lucrative employer contribution, and leaving the company soon afterward. Funds the employee has contributed, however, are typically available in full and may be accessed at retirement or transferred to a new employer’s savings plan no matter how long the employee has been with the company.

Overview

There are numerous types of employer-sponsored retirement plans, each with its own benefits and drawbacks. In general, such plans can be divided into defined contribution plans and defined benefit plans. The former category, which includes 401(k) and 403(b) plans, describes plans in which the employee and sometimes the employer make contributions to the plan, which does not guarantee the payment of a specific amount of money come retirement. Defined benefit plans, on the other hand, pay a specific regular sum during retirement. Such plans, which include many pension plans, are relatively rare in the twenty-first-century United States.

The 401(k) is one of the most popular employer-sponsored retirement plans in the United States. When participating in a 401(k), an employee may deposit a portion of their pre-tax income into the retirement account. The employer may also make contributions, which may become available to the employee in accordance with a specific vesting schedule. Specialized 401(k) plans known as safe harbor 401(k) plans and SIMPLE (Savings Incentive Match Plan for Employees) 401(k) plans require that employer contributions not be subject to a vesting schedule. Once the funds in an employee’s retirement account are available, they may invest them in various securities, such as mutual funds.

Although 401(k) plans allow employees to save a significant amount of their pretax income, some restrictions do apply. The amount of money an employee deposits in one year may not exceed the maximum amount set by the US government, which in 2025 was $23,500 for traditional, safe harbor, and SIMPLE 401(k) plans. Some plans set lower contribution limits, while some also allow employees over the age of fifty to make additional deposits, known as "catch-up contributions." The latter policy enables employees who began saving for retirement later in life, or who simply wish to contribute more to their savings, to improve their retirement outlook. Limits on total contributions made by both the employee and the employer into 401(k) plans stipulate that the total amount of contributions cannot exceed the employee’s yearly pretax compensation or another set limit (which was $70,000 in 2025), whichever is lower.

The 403(b) plan is similar to a 401(k) plan in that it allows for pretax employee contributions as well as for employer contributions. Participation in such plans is generally limited to public school employees, employees of certain nonprofit organizations, and some members of the clergy. Much like traditional 401(k) plans, 403(b) plans typically have an employee contribution limit and a total contribution limit and often allow employees over fifty to make catch-up contributions. Some plans allow employees who have worked for the school or nonprofit organization for a minimum of fifteen years to make catch-up contributions as well, regardless of age.

Similar to 401(k) and 403(b) plans, 457(b) plans allow employees to make tax-deferred contributions up to a specified limit, and they also frequently allow older employees to make catch-up contributions. Employer contributions to 457(b) plans are permitted, but this is not as common as is seen in other types of plans. Much like 403(b) plans, 457(b) plans are restricted to certain types of workers and are generally offered only to employees of local or state governments and employees of certain tax-exempt organizations.

Employee stock ownership plans (ESOPs) differ significantly from most other retirement plans in that employer contributions are made in the form of company stock. In an ESOP, an employer establishes a trust into which it deposits shares of company stock or funds to purchase shares of stock. Employees then receive shares of the trust as their employer contributions. Upon leaving the company, an employee typically sells the shares back to the employer for the current market value. Shares generally become available in accordance with a vesting schedule. Although ESOPs, like many other retirement plans, have a host of tax benefits for both employees and employers, they also represent certain risks. Most notable is the risk that company stock might decline in value between when the employer contributes it to the trust and when an employee retires or otherwise leaves the company. In such a case, the employee’s retirement savings account could dramatically decrease in value. Because of this, a company that offers an ESOP may choose to pair it with a more traditional plan such as a 401(k).

Employers throughout the United States may offer one of a number of additional, less common, retirement plans for the benefit of their employees. In profit-sharing plans, the employer allocates a certain portion of its yearly profits for retirement contributions, dividing the overall sum among its employees based on factors such as employee salary. Such plans may be paired with 401(k) plans to allow for employee contributions. SIMPLE individual retirement account (IRA) plans follow the same investment, distribution, and rollover rules as traditional IRAs, but they are typically offered by small businesses and allow employees to make elective tax-deferred retirement contributions. SIMPLE IRAs differ from most other plans in that employers must make a minimum contribution to each employee’s account, even if the employee has not elected to contribute funds personally.

Pension plans have become increasingly rare in the twenty-first century but remain especially noteworthy, as they are often run as defined benefit plans. When participating in a defined-benefit pension plan, an employee makes contributions, usually tax-free, which are then invested in various securities. The pension plan then provides retired employees with a defined amount of money on a set basis, regardless of how well those securities perform.

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