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Quick Answer
Employer-sponsored retirement plans are retirement savings programs offered through an employer that allow workers to contribute pre-tax or after-tax income toward retirement. Many employers also provide matching contributions, helping employees build retirement savings faster.
Employer-Sponsored Retirement Plans Comparison
| Retirement Plan | Who Typically Uses It | Employer Contributions | Tax Treatment |
|---|---|---|---|
| SEP IRA | Small businesses and self-employed individuals | Employer only | Tax-deferred |
| SIMPLE IRA | Small businesses with employees | Required employer contribution | Tax-deferred |
| 401(k) | Private-sector employees | Often matched | Tax-deferred |
| Roth 401(k) | Employees with Roth option | May be matched | Tax-free qualified withdrawals |
| 403(b) | Nonprofit and educational employees | May be matched | Tax-deferred |
| 457(b) | Government employees | May be offered | Tax-deferred |
| Defined Benefit Plan | Traditional pension participants | Employer funded | Pension income at retirement |
There is an assumption by many people that employer-sponsored retirement plans are generic. The fact is that there are several types of retirement plans which an employee can operate with an aim of saving for retirement.
Your choice of a retirement plan is determined by several factors about your employer such as, what economic sector the employer is involved with as well as the size and type of that employer.
An employer-sponsored plan for saving towards retirement can be used by both the employee and the employer. By having money directly deducted from the pay check, both parties get a chance to save even before they start on spending the pay check. Some employers even go an extra step of matching their employees’ contribution, something you wouldn’t mind, now would you? Plus this will definitely act as a direct incentive to save more.
The seven most popular employer-sponsored retirement plans and their features are:
SEP Plan (Simplified Employee Pension)
- This retirement option is mostly offered by small businesses to their employees.
- As an employee you can also set up one yourself.
- Typically known as a SEP-IRA plan, it is based on Individual Retirement Accounts.
- For 2025, SEP IRA contributions are limited to the lesser of 25% of compensation or $70,000..
SIMPLE Plan (Savings Incentive Match Plan for Employees)
- Offered by small employers to their employees.
- As an employee you contribute an amount of your choice and your employer can match that amount up to 3% of your salary.
- There is a limit to how much contribution one can make in a year, for instance, For 2025, employees can contribute up to $16,500 annually, with an additional $3,500 catch-up contribution available for eligible participants age 50 and older. If one is 50 years and above, there is a provision for a ‘catch-up’ contribution which also has a limit ($3,000 for 2016).
401(k) Plan
- Is mostly offered by large businesses.
- It is funded by an employee but the employer may also contribute a matching amount.
- The account is wholly managed by the employee including choice of how to invest the funds. These contributions are usually tax-deferred up until the time withdrawal is done at retirement age.
- If the funds are withdrawn before retirement, one is penalized.
- There is a limit to how much one can contribute annually, for instance for 2025, employees may contribute up to $23,500 annually, plus eligible catch-up contributions if they are age 50 or older.
Roth 401(k) plan
- The benefits are the same as with a Roth IRA and the contributions by an employee are similar with a 401(k) plan.
- Employee contribution limits are also the same as those of a 401(k) plan, which is better than for a Roth IRA.
- Any contribution into this plan is not tax-deductible.
- All earnings accumulate tax.
- Roth 401(k) plans share the same employee contribution limits as traditional 401(k) plans, allowing up to $23,500 in employee contributions for 2025.
403(b) Plan
- This is identical to the 401(k) plan save for the fact that it is designed for NGOs.
- 403(b) Plans are funded by employees primarily with tax-deductible contributions.
- Employers can match contributions but to a certain percentage.
- For 2025, employees can contribute up to $23,500, with additional catch-up contributions available for eligible participants
457 Plan
- These plans are similar to 401(k) plans and are offered to local and state government employees.
- They have identical characteristics with 401(k) plans including contribution limits.
- The main difference is that if an employer offers both a 401(k) Plan and a 457 Plan, as an employee you can contribute fully to both plans hence the benefit of a doubled limit.
- The employee contribution limit for governmental 457(b) plans is $23,500 in 2025, and some participants may qualify for special catch-up contribution provisions.
Defined Benefits Pension Plan
- The plan is also known as a traditional retirement plan.
- It was more common in the 1970s.
- Replaced by defined contribution plans.
- The plan is controlled fully by the employer and the employee has no control at all over the funds. The employer is responsible for supplying the employees’ contribution and the monthly benefit given to him/her.
