Why do some companies offer 401k retirement plans?
"I agree with the other answers that it is a benefit, but wanted to add another explanation for this: Also, why a company would prefer matching someone's contributions (and   given him or her additional free money) instead of just offering a   simple raise? In addition to a match being a benefit that is part of your total compensation, 401ks have special rules for Highly Compensated Employees.  If the lower paid employees do not contribute, the ""Highly Compensated Employees"" do not get to take full advantage of the 401k.   By offering a match, more lower paid employees will take advantage of a 401k program allowing more Highly Compensated Employees to also take advantage of the program." "IRA is not always an option. There are income limits for IRA, that leave many employees (those with the higher salaries, but not exactly the ""riches"") out of it. Same for Roth IRA, though the MAGI limits are much higher. Also, the contribution limits on IRA are more than three times less than those on 401K (5K vs 16.5K). Per IRS Publication 590 (page 12) the income limit (AGI) goes away if the employer doesn't provide a 401(k) or similar plan (not if you don't participate, but if the employer doesn't provide). But deduction limits don't change, it's up to $5K (or 100% of the compensation, the lesser) even if you're not covered by the employers' pension plan. Employers are allowed to match the employees' 401K contributions, and this comes on top of the limits (i.e.: with the employers' matching, the employees can save more for their retirement and still have the tax benefits). That's the law. The companies offer the option of 401K because it allows employee retention (I would not work for a company without 401K), and it is part of the overall benefit package - it's an expense for the employer (including the matching). Why would the employer offer matching instead of a raise? Not all employers do. My current employer, for example, pays above average salaries, but doesn't offer 401K match. Some companies have very tight control over the 401K accounts, and until not so long ago were allowed to force employees to invest their retirement savings in the company (see the Enron affair). It is no longer an option, but by now 401K is a standard in some industries, and employers cannot allow themselves not to offer it (see my position above)." Let me add another consideration to the company's side of the equation.  Not only is a 401K a tool for the company to make them competitive when recruiting employees among other companies that offer that benefit, it is also a good retention tool. Most company's 401K plans include a vesting period of at least 3 years, sometimes more. An employee that leaves the company before they are vested in the plan will have to give up some % of the employer matched funds in the account. This gives employees incentive to stick around longer and the company reduces the risk of turnover which can be costly in terms of training and recruiting. This also factors into the reason why employers would rather give matching on the 401K than a simple pay raise. Some of those employees are going to leave during the vesting period anyway, and when that happens the employer got the benefit of motivating (extrinsically) the employee, but in the end got to keep some of the money. Stated plainly... it's a benefit. Companies are not required to offer you any compensation above paying you minimum wage. But benefits attract higher quality employees.  I think a big part of it is that it is the norm. Employees want it because of the tax benefits. Employees expect it because almost all reputable companies of any significant size offer it. You could run a great company, but if you don't offer a 401k plan, you can scare away good potential employees. It would give a bad impression the same way that not offering health insurance would. "The company itself doesn't benefit. In most cases, it's an expense as the match that many offer is going to cost the company some percent of salary.  As Mike said, it's part of the benefit package. Vacation, medical, dental, cafeteria plans (i.e. both flexible spending and dependent care accounts, not food), stock options, employee stock purchase plans, defined contribution or defined benefit pension, and the 401(k) or 403(b) for teachers. Each and all of these are what one should look at when looking at ""total compensation"". You allude to the lack of choices in the 401(k) compared to other accounts. Noted. And that lack of choice should be part of your decision process as to how you choose to invest for retirement. If the fess/selection is bad enough, you need to be vocal about it and request a change. Bad choices + no match, and maybe the account should be avoided, else just deposit to the match.  Note - Keith thanks for catching and fixing one typo, I just caught another." One important thing that hasn't been mentioned here is that the vast majority of companies have eventually eliminated their Company provided Pension Plans and replaced it with a 401K with some degree of matching.  There is a cost advantage to doing this as companies no longer have to maintain or work to maintain a 100% vested pension plan.  This takes a great burden off them.  They also don't have to manage the pension/annuity that the retirement benefit entails.
easier access to your money That can be a disadvantage for some people. Based on the number of people who tap their 401K for non-retirement reasons, or just cash it in when they change jobs; making it painful to use before retirement age does keep some people from spending it too early. They need to be able to compartmentalize the funds in order to understand the difference between funds spending, saving and investing for retirement. Roth 401K One advantage that the 401K may have is  that you can in many plans invest the funds in a Roth 401K. This allows you to go beyond the Roth IRA limits. You are currently investing the maximum amount in your Roth IRA, so this could be a big advantage. "I am not 100% sure, but I think the answer is this:  You can't max out both.  You could theoretically max out the SIMPLE IRA ($11,500) and then contribute $4,000 to your 401k, but your total can't exceed the 401k limit of $16,500.  This also means you could max out your 401k at $16,500, but you couldn't contribute anything to the SIMPLE IRA.  Note that no matter what, you can't contribute more than $11,500 to your SIMPLE IRA. (Note that this is all independent from your Traditional or Roth IRA, which are subject to their own limits, and not affected by your participation in employer-sponsored plans.) As I understand it, a 401k and a SIMPLE IRA both fall under the umbrella of ""employer-sponsored plans"".  Just like you can't max out two 401k's at two different employers, you can't do it with the 401k and the SIMPLE IRA.  The only weird thing is the contribution limit differences between SIMPLE IRA and 401k, but I don't think the IRS could/would penalize you for working two jobs (enforcing the lower SIMPLE IRA limit for all employer-sponsored retirement accounts). You should probably run the numbers, factoring in the employer match, and figure out which account-contribution scenario makes the most financial sense for you.  However, I'm not sure how the employer match helps you when you're talking about a small business that you own/run.  You may also want to look at how the employer match of the SIMPLE IRA affects the taxes your business pays. Disclaimer #1:  I couldn't find a definitive answer on your specific scenario at irs.gov.  I pieced the above info from a few different ""SIMPLE IRA info"" sites.  That's why I'm not 100% sure.  It seems intuitively correct to me, though.  Does your small business have an accountant?  Maybe you should talk to him/her. Disclaimer #2:  The $ amounts listed above are based on the IRS 2010 limits." Specifically on the subject of maxing out your 401k, there are several downsides: The employer match usually only applies to the first 6%. Some employers offer no match at all. You listed the match as a pro, but I think it should be pointed out that you can usually get this benefit without maxing out your plan. The investment options are limited. Usually there is at least one fund available from all the common investment classes, but these may not be your preferred funds if you were able to choose for yourself. Fees can be very high. If you are working for a small to medium size company, the fees for each fund will often be higher than for the same funds in a plan offered by a large company. Fees are usually related to the dollar amount of assets under management. Each person has a different tax situation, so if you are single and making 6 figures, you might still be in the 25% bracket even after maxing out your 401k, but the same person filing jointly with a spouse that makes less could get down to the 15% bracket with a smaller contribution. I meet my retirement savings goals without maxing out the 401k. As long as the amount is above the employer match amount, my second priority is to funnel as much money as possible in to my IRA (because I get lower fees and better investment options from Vanguard). Does you job offer a retirement plan?  (401k, SIMPLE, etc)  Does your employer offer a match on contributions? Typically an employer will match what you put in, up to a certain percentage (e.g. 3%). So, say you contribute 3% of your paycheck into your retirement plan. If your employer mathes that, you've effectively contributed 6%. You've just doubled your money! The best thing a young professional can do is to contribute to your employer-matched retirement plan, up to the maximum amount they will match. You should do it immediately.  If not, you are leaving money on the table. Companies are required BY THE IRS to try to get everybody to contribute minimal amounts to the 401K's.  In the past, there were abuses and only the execs could contribute and the low paid workers were starving while the execs contributed huge amounts.   On a year-by-year basis, if the low-paid employees don't contribute, the IRS punishes the high paid employees.  Therefore, most employers provide a matching program to incentivize low-paid employees to contribute. This 9% limitation could happen in any year and it could have happened even before you got your pay raise, what matters is what the low-paid employees were doing at your company LAST YEAR. "The same author wrote in that article “they have a trillion? Really?” But that’s what happens when ten   million dollars compounds at 2% over 200 years. Really? 2% compounded over 200 years produces a return of 52.5X, multiply that by 10M and you have $525 million. The author is off by a factor of nearly 2000 fold. Let's skip this minor math error.  The article is not about 401(k)s. His next line is ""The whole myth of savings is gone."" And the article itself, ""10 Reasons You Have To Quit Your Job In 2014"" is really a manifesto about why working for the man is not the way to succeed long term. And in that regard, he certainly makes good points. I've read this author over the years, and respect his views. 9 of the 10 points he lists are clear and valuable. This one point is a bit ambiguous and falls into the overgeneraluzation ""Our 401(k) have failed us."" But keep in mind, even the self employed need to save, and in fact, have similar options to those working for others. I have a Solo 401(k) for my self employment income.  To be clear, there are good 401(k) accounts and bad. The 401(k) with fees above 1%/yr, and no matching, awful. The 401(k) I have from my job before I retired has an S&P index with .02%/yr cost. (That's $200/$million invested per year.) The 401(k) is not dead." You're going to find a lot of conflicting or vague answers on the internet because there are a lot of plan design elements that are set by the plan sponsor (employer).  There are laws that mandate certain elements and dictate certain requirements of plan sponsors, many of these laws are related to record keeping and fiduciary duty.  There is a lot of latitude for plan sponsors to allow or restrict employee actions even if there is no law against that activity.   There are different rules mandated for employee pre-tax contributions, employee post-tax contributions, and employer contributions.  You have more flexibility with regard to the employer contributions and any post tax contributions you may have made; your plan may allow an in-service distribution of those two items before you reach age 59.5. While your HR department (like most -all- HR departments) is not staffed with ERISA attorneys and CPAs it is your HR department and applicable plan documents that will lay out what an employee is permitted to do under the plan. The presence of the 401K option means that your ability to contribute to an IRA will be limited, it doesn't matter if you contribute to the 401K or not. Unless your company allows you to roll over 401K money into an IRA while you are still an employee, your money in the 401K will remain there. Many 401K programs offer not just stock mutual funds, but bond mutual funds, and international funds. Many also have target date funds. You will have to look at the paperwork for the funds to determine if any of them meet your definition of low expense. Because any money you have in those 401K funds is going to remain in the 401K, you still need to look at your options and make the best choice. Very few companies allow employees to invest in individual stocks, but some do. You can ask your employer to research other options for the 401K. The are contracting with a investment company to make the plan. They may be able to switch to a different package from the same company or may need to switch companies. How much it will cost them is unknown. You will have to understand when their current contract is up for renewal.  If you feel their current plan is poor, it may be making hiring new employees difficult, or ti may lead to some employees to leave in search of better options. It may also be a factor in the number of employees contributing and how much they contribute.