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Should You Offer a 401(k) Match to Your Employees? Here Are 3 Things You Must Consider. It can be tough for new or small businesses to offer 401(k) matching, so here's what you should consider before implementing a program.

By Matt Baisden Edited by Maria Bailey

Opinions expressed by Entrepreneur contributors are their own.

Employer matching contributions to retirement plans are often seen as costly commitments by business owners. As it stands, 48% of private sector workers in the United States don't have access to a 401(k) or pension plan, according to an AARP study. Yet, for employers, they are worth investing in.

Companies are beginning to understand the positive effects that matching can have on employee loyalty. Offering a 401(k) matching program provides both employers and employees with countless benefits. For example, a 401(k) match might seem expensive, but it's one of the most cost-effective benefits you can offer your employees. A match is tax-deductible for you, reducing your after-tax burden.

Related: Searching for Talent? Consider Setting Up a 401(k) for Your Small Business to Keep Up in the Market.

3 things to remember about 401(k) matching

It's important to take time to make an informed decision and set your company on the right path to providing a secure retirement plan for your team. Consider these three things when deciding whether or not to offer 401(k) matching to your employees:

1. Consider how it will affect your recruitment and retention efforts

Offering a matching contribution can be a great way to recruit and retain star employees. To an in-demand candidate, a matching contribution can make an employer stand out. A matching program can also jump-start an employee's retirement savings. Savings of 10-15% are generally recommended for retirement, but when you kick in a contribution, this requirement lessens, making it much easier for employees to reach their retirement goals.

Employers tend to offer a match-up to a certain percentage of an employee's salary. Suppose someone earns $50,000 per year; a 3% match would be $1,500. Consider if your business can afford a match, but also remember that the cost is sometimes worth the loyalty.

Because loyalty is a factor, many large, well-known companies participate in 401(k) matching programs and match certain percentages up to IRS contribution limits. For instance, Amazon and Apple match 50% of employee contributions for up to 4- 6%, respectively. Apple will match 50 or 100% of employee contributions for up to 6%, depending on how long an employee has been with the company. Netflix matches 100% of employee contributions for up to 4%.

Related: 12 Pro Tips That Will Increase Company Retention

2. Consider your cash flow and predictable business growth and expenses

When it comes to your matching contribution, you have two primary options: You can pay for it on a per-payroll basis, or you can wait until the end of the year and fund it all at once. Depending on the financial flow of your business, either method might make sense. Generally, per payroll is preferable since you will need to account for the matching amount in your cash flow planning if you wait until the end of the year. Therefore, putting the money into accounts as you go is often easier.

For per-payroll matches, if your company decides to match 50% for up to 6% of savings, an employee who contributes 6% in a paycheck would receive their 3% matching during the same payroll period. Employees often favor this as it gets their match dollars into their retirement accounts almost immediately. If an employee stops contributing at any point during the year, their employer would have nothing to match, resulting in no retirement deposit.

For end-of-year matching, the plan reviews how much each employee contributed in total after the year is over. Using the match formula, the company calculates how much match the employee is due and makes the contribution all at once. These contributions usually happen in late winter or early spring of the following year, so it can be a long wait for employees. If they contribute in 2023, they may not get their match until well into 2024.

The annual match does benefit some employees if they have swings in income. Someone who saves 10% for the first half of the year and then drops to 2% in the second half could get a full match. That may not work out as well on the per-payroll process.

3. Consider whether now is the right time to start matching at all

If your business is struggling, you may not be able to fund a 401(k) matching program. Turning on and off a match program is extremely hard to explain to employees — even if you warned them in advance. Ultimately, the value of an employee benefit is not defined by a business or its owners. It is determined by the employees themselves. Their experience trumps any owners' or leaders' beliefs, so make sure you consider how your employees feel before implementing anything.

Alternatively, you could offer profit-sharing contributions when the company is doing well. Profit sharing is a component of your 401(k) plan where companies can make a discretionary deposit to employees. Companies may choose to go this route if they are in a volatile industry that has extreme highs and lows in cash flow. This can be a great way to ease concerns about 401(k) matching if you are unable to implement that benefit.

Related: What Is a 401(k) and How Does It Work?

When choosing the type of matching contribution that works best for your business, consider your budget and cash flow as well as the expectations of your employees. A 401(k) matching program can boost employee morale and encourage your team to save for retirement. It can also help you recruit and retain top talent. Take time to review all of the options available, and choose the type of matching that will work best for your organization.

Matt Baisden

Entrepreneur Leadership Network® Contributor

Retirement plan advisor at Plancorp

Matt Baisden (CFA, QKA) is a retirement-plan advisor at Plancorp, a full-service wealth-management company serving companies and families in 44 states and managing more than $5.5 billion in client assets.

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