401(k) Plans: More Control, More Growth, More Responsibility

In the early 1980s, 401(k) plans began gradually replacing traditional pensions, and within a decade, the 401(k) had become the go-to retirement savings solution. Today, Americans are estimated to hold between $5 trillion and $10 trillion in 401(k) assets. In 2023, roughly two-thirds of private sector employees in the United States had the opportunity to participate in a defined contribution retirement plan, such as a 401(k), according to the Bureau of Labor Statistics.

So, why did the 401(k) become so popular? Because the plan offers mutual benefits for both employers and employees.

Traditional defined-benefit pensions create long-term liabilities for employers because they promise a fixed stream of payments to retirees, often based on salary and years of service. In contrast, 401(k) plans shifted the responsibility for saving to the individual. By reducing long-term liabilities, companies could improve financial metrics such as debt-to-equity and return on assets. Additionally, employer contributions to 401(k) plans are tax-deductible for the business. Employer matches—typically a percentage of the employee’s salary deferral—are usually predetermined by the plan’s design and not generally tied to company profits. Many plans also include a profit-sharing component, allowing employers to contribute a portion of earnings during strong years, with the flexibility to reduce or eliminate contributions in leaner times. More recently, small businesses have become eligible for tax credits to offset the start-up costs of offering a 401(k) plan.

In a competitive job market, a strong benefits package, including a 401(k), can help businesses attract and retain top talent. When employees feel confident about their financial well-being and future, job satisfaction and engagement tend to improve.

For employees, a401(k) provides greater control over retirement savings. Social Security benefits were designed to replace roughly 40% of pre-retirement income, leaving workers responsible for funding the remaining 60%. In 2025, employees can contribute up to $23,500 to a 401(k)—more than many other tax-deferred savings vehicles. Those aged 50 and older can also make catch-up contributions, further increasing their annual savings. Contributions stemming from salary deferrals are not subject to income tax withholding when deferred, enabling employees to save more upfront and defer taxes. However, funds are taxed as ordinary income when withdrawn in retirement. Additionally, employer matching contributions do not count toward the employee’s contribution limit—essentially offering free money for participating in the plan. Over time, the combination of tax-deferred growth and compounding returns can significantly increase the value of an employee’s retirement nest egg.

401(k) plans also made it easier for employees to retain their retirement benefits when changing jobs. Unlike pensions, which often require long tenures to vest fully, an employee’s 401(k) contributions are always theirs and can roll into an IRA or a new employer’s 401(k) plan, allowing their retirement savings to remain invested and continue growing tax-deferred.

Through long-term investing, the power of compound interest, generous contribution limits, and the potential for employer matches and profit-sharing contributions, 401(k) plans can build substantial retirement savings. Starting contributions early in one’s career—even in small amounts—can make a big difference, as retirement savings have more time to grow and benefit from market gains. It’s no wonder the 401(k) has become one of the primary assets many investors own.

If you have questions on how a 401(k) plan can benefit you, the experts at Henssler Financial will be glad to help: