Employee retirement plans enable employees to set aside funds for their future financial security, while plan sponsors—typically employers—are responsible for selecting, implementing, and overseeing these arrangements. Choosing the right plan isn’t just a procedural requirement; it demands a deliberate balance among cost control, ERISA compliance, fiduciary risk management, and the goal of attracting and engaging employees.
This guide compares eight common plan types—401(k), cash balance, 403(b), 457, ESOPs, SEP IRAs, SIMPLE IRAs, and profit-sharing—each with its own eligibility criteria, contribution formulas, and administrative requirements. You’ll find clear, actionable insights that let you weigh the trade-offs and determine which solution best aligns with your organization’s objectives and your team’s needs.
You’ll also see how partnering with a qualified third-party administrator and fiduciary expert can streamline paperwork, safeguard compliance, and let you focus on your core business. We begin with the 401(k) plan.
1. 401(k) Plans
A 401(k) plan is a tax-advantaged defined contribution arrangement that allows employees to defer a portion of their salary—either on a traditional pre-tax or Roth after-tax basis—and offers employers the flexibility to make matching or discretionary profit-sharing contributions. Thanks to its blend of tax benefits, portability, and customization, the 401(k) remains the most popular retirement vehicle for employers of all sizes.
Overview and Key Features
Employees choose how much to defer, typically as a percentage of pay, and decide between traditional pre-tax contributions (which reduce taxable income today) or Roth contributions (which grow tax-free and qualify for tax-free withdrawals). Employers often use a match formula—commonly 50% of deferrals up to 6% of pay—to incentivize participation. On top of matches, many sponsors add discretionary profit-sharing credits, letting them reward company performance. Finally, 401(k) assets can roll over to IRAs or successor employer plans, giving employees seamless portability as their careers evolve.
Tax Advantages and Employer Matching Options
From a sponsor’s standpoint, every dollar contributed is tax-deductible. Employees reap immediate tax relief with pre-tax deferrals, while Roth contributions forgo the upfront deduction in favor of tax-free growth and distributions. In 2025, individuals may defer up to $23,000, with those age 50 and older eligible for a $7,500 catch-up. For example, an employee earning $60,000 who defers 6% ($3,600) and receives a 3% employer match ($1,800) will see $5,400 added to their retirement savings annually.
Contribution Limits and Catch-Up Provisions
The total limit for combined employee and employer contributions in 2025 is $66,000 (or $73,500 including catch-ups for those 50+). Catch-up provisions help mid-career and near-retirement employees accelerate their savings pace. Compared to other plan types—like SIMPLE IRAs or SEPs—the 401(k)’s higher thresholds make it ideal for maximizing annual retirement contributions.
Compliance and Administration Requirements
Sponsoring a 401(k) triggers ERISA requirements: maintaining a plan document, distributing a summary plan description (SPD), securing a fidelity bond, and conducting nondiscrimination testing. Plans with more than $250,000 in assets must file Form 5500 annually. This report is due by the last day of the seventh month after the plan year ends (July 31 for calendar-year plans) and must be submitted via EFAST2. Employers can request an extension with Form 5558. Late or incomplete filings can incur penalties up to $2,259 per day from the DOL and $250 per day (capped at $150,000) from the IRS. For full details on filing, see Form 5500 Filing Requirements.
Adoption Rates and Industry Statistics
Approximately 80% of U.S. employers with 50 or more employees sponsor a 401(k), covering roughly 60 million participants. On average, companies contribute about 3% of salary in matching funds. Surveys from Pensions & Investments and PLANSPONSOR consistently rank the 401(k) as the leading defined contribution plan, highlighting its blend of flexibility, tax efficiency, and employee appeal.
2. Cash Balance Plans
Cash balance plans blend features of defined benefit and defined contribution arrangements. From an employer’s perspective, they function like a retirement plan with a guaranteed benefit, but participants see an individual “account” that grows each year with a specified pay credit and an interest credit. This hybrid nature creates more predictable costs and appealing benefits on both sides of the table.
How Cash Balance Plans Work
Each participant’s account receives two types of credits:
- Pay credit: a percentage of the employee’s salary (for example, 5% of pay).
- Interest credit: a fixed or variable rate applied to the account balance annually (often tied to a benchmark like the 10-year Treasury yield).
For instance, consider a participant with a $100,000 annual salary:
- Yearly pay credit: $5,000 (5% of salary).
- Interest credit: 4%.
Over a 20-year career, the formula
Balance_n = Balance_{n-1} * (1 + 0.04) + 5000
produces an ending balance of approximately $178,000. The transparency of this “account” helps employees track their progress as though they were in a defined contribution plan.
Benefits for Employers
Employers appreciate the predictability and potential for higher annual contributions. Business owners can:
- Lock in accelerated tax deductions by funding the plan at higher levels—often far beyond limits in a 401(k).
- Allocate as much as $80,000 or more per year for a high-earning owner, reducing taxable income more aggressively.
- Manage cash flow with flexibility, since plan contributions can be adjusted (within IRS limits) each plan year based on profitability.
Benefits for Employees
Participants benefit from a clear view of their retirement savings and often enjoy:
- Portability, because account balances can be rolled into an IRA or another qualified plan upon termination.
- The security of a guaranteed benefit, backed by PBGC insurance (subject to limits), which promises payment even if the plan sponsor faces financial trouble.
Compliance, Funding and Insurance
As a defined benefit plan, a cash balance arrangement must satisfy actuarial valuation and minimum funding rules each year. Employers work with an actuary to:
- Calculate the present value of promised benefits.
- Determine required contributions to keep the plan adequately funded.
Additionally, the plan is covered by the Pension Benefit Guaranty Corporation. Participants are protected up to statutory limits—details at PBGC Guaranteed Benefits.
Adoption Trends and Credibility Data
Cash balance plans are on the rise. In 2023, over 10,000 such plans were in place—a 40% increase since 2013. Employers typically contribute an average of $10,000 per participant annually. Their growing appeal is particularly pronounced among professional services and tech firms seeking to reward key talent while optimizing tax strategies.
3. 403(b) Plans
A 403(b) plan is a tax-advantaged retirement arrangement designed for employees of public schools, certain 501(c)(3) nonprofits, and ministers. Often referred to as a Tax-Sheltered Annuity (TSA), these plans let eligible workers defer salary into contracts or custodial accounts, growing tax-deferred until distribution. While similar in many ways to a 401(k), a 403(b) has its own rules around contributions, investment products, and service-based catch-up opportunities.
Eligibility and Plan Structure
Organizations that can sponsor a 403(b) include public educational institutions, nonprofit hospitals, charitable organizations under section 501(c)(3), and certain ministries. Plans typically offer two contract types:
- Annuity contracts issued by insurance companies, which guarantee a minimum interest rate.
- Custodial accounts holding mutual funds, which provide a broader range of market-based investments.
Each employee maintains an individual account within the plan, but the underlying asset—whether an annuity or mutual fund—is selected and overseen by the employer or trustee.
Contribution Limits and Catch-Up Provisions
For 2025, employee elective deferrals into a 403(b) are capped at $23,000, with an additional $7,500 catch-up for participants age 50 or older. On top of these standard limits, the “15-year rule” allows employees with at least 15 years of service with the same employer to make up to a $3,000 extra deferral each year, subject to a lifetime limit of $15,000. This provision can be especially valuable for long-tenured educators and nonprofit staff looking to accelerate their savings.
Investment Options and Fee Considerations
403(b) plans often feature a mix of insurance-based annuities and mutual fund portfolios. While annuities may carry higher surrender charges and lower transparency, custodial accounts typically offer more competitive expense ratios and easier fee disclosure. When selecting vendors:
- Look for clear fund line-up disclosures and low expense ratios.
- Confirm whether annuity riders (like death benefits) add unnecessary costs.
- Assess how investment menus and service fees compare to similar plans in your sector.
Compliance and Administrative Requirements
Although 403(b) plans enjoy some ERISA exemptions—particularly for church-controlled and small nonprofit arrangements—they still must:
- Conduct ADP/ACP nondiscrimination testing if ERISA-covered.
- File Form 5500 when plan assets exceed $250,000 at year-end.
- Maintain a written plan document, distribute a summary plan description (SPD), and adhere to vesting schedules and contribution limits.
Failing these requirements can trigger IRS and DOL penalties, underscoring the value of diligent plan administration.
Adoption Rates and Participant Demographics
Roughly 4 million Americans participate in 403(b) plans, with nearly every public school district offering one as a primary retirement vehicle for teachers and staff. Nonprofit hospitals and charitable organizations increasingly adopt these plans to compete for talent, making the 403(b) a mainstay in the education and nonprofit sectors.
4. 457 Plans
A 457 plan is a deferred-compensation arrangement offered by state and local governments and certain tax-exempt nonprofits. Like 401(k) and 403(b) plans, participants elect to defer a portion of their salary on a pre-tax (or, in some cases, Roth after-tax) basis. However, 457 plans are distinct in their distribution rules and catch-up options, making them an attractive complement—or alternative—to other retirement vehicles for eligible employees.
Types of 457 Plans: 457(b) vs. 457(f)
There are two primary flavors of 457 plans:
• 457(b) Plans: The most common version, 457(b) allows participants to defer salary up to the IRS limit ($23,000 for 2025) and make age-50+ catch-up contributions. Assets are held in a trust or custodial account, insulated from the employer’s general assets.
• 457(f) Plans: These unfunded, nonqualified arrangements are designed for highly compensated staff. Benefits are subject to a substantial risk of forfeiture until certain conditions are met (e.g., vesting or performance goals). Because 457(f) promises aren’t backed by a trust, participants have unsecured claims against the employer’s general assets.
Contribution Limits and Special Catch-Up Rules
For 2025, the standard elective deferral limit for a 457(b) plan is $23,000, matching the ceiling for 401(k) and 403(b) plans. Participants age 50 and older can also contribute an additional $7,500 catch-up. Unique to 457(b) plans is the “three-year” or “pre-retirement” catch-up: during the three calendar years immediately preceding normal retirement age, eligible employees can defer the lesser of:
• Twice the annual limit (2 × $23,000 = $46,000), or
• The sum of unused deferral space from prior years.
This special catch-up can propel savings for those who started deferrals later in their careers.
Distribution Rules and Penalties
457(b) plans allow withdrawals upon one of several “triggering events”: separation from service, attainment of age 70½, or unforeseeable emergency. Unlike 401(k) and 403(b) plans, 457(b) distributions are exempt from the 10% early-withdrawal penalty—even if taken before age 59½—providing greater flexibility for participants who need access to their funds. However, ordinary income tax applies upon distribution.
Comparison to 401(k) and 403(b)
While 401(k), 403(b), and 457(b) plans share many features—salary deferrals, employer contributions, catch-up provisions—a few distinctions stand out:
• Penalty treatment: 457(b) plans bypass the 10% early-withdrawal penalty, making funds more accessible.
• Catch-up options: The three-year catch-up in 457(b) plans can exceed the standard age-50 catch-up available in 401(k)s and 403(b)s.
• Employer backup: 457(b) assets can remain subject to the employer’s creditors unless held in a trust, a consideration when evaluating plan security.
Adoption Statistics and Asset Growth
Approximately 2 million participants across government and nonprofit entities contribute to 457(b) plans, which hold an estimated $150 billion in assets. Adoption among nonprofits has steadily increased as employers seek flexible, penalty-free savings vehicles to attract mid- and senior-level talent.
5. Employee Stock Ownership Plans (ESOPs)
Employee Stock Ownership Plans (ESOPs) are retirement plans that invest primarily in shares of the sponsoring company, creating a direct ownership stake for employees. ESOPs serve dual purposes: they provide a retirement vehicle and align employee interests with business performance. By channeling contributions into company stock, ESOPs turn employees into shareholders, potentially boosting engagement and retention.
Structure and Operation of ESOPs
An ESOP is established through a trust that acquires company stock either by new issuance or from existing shareholders. In many cases, the trust takes out a leveraged loan to purchase shares (a leveraged ESOP). As the loan is repaid—funded by company contributions—shares are released from a suspense account and allocated to individual employee accounts. Allocation typically follows a formula based on compensation or tenure. Over time, employees accumulate shares, and the trust holds unallocated shares until the debt is retired.
Benefits for Employers
ESOPs offer significant tax advantages. Contributions of stock are tax-deductible, as are cash contributions used to repay ESOP debt. When structured correctly, sellers in an S corporation ESOP can reinvest proceeds tax-deferred through a Section 1042 exchange. Beyond fiscal perks, ESOPs can enhance employee loyalty and productivity by giving workers a tangible stake in company success, often translating into lower turnover and a more motivated workforce.
Benefits for Employees
Through an ESOP, employees gain an ownership interest without needing to invest personal capital. As the company grows, so does the value of their accounts—potentially resulting in substantial retirement wealth. Upon retirement, death, disability, or termination, participants receive the fair market value of their shares. Payouts may be in cash or company stock, depending on plan design, and are typically distributed over a period to manage company liquidity.
Regulatory Requirements and Fiduciary Duties
ESOP sponsors must adhere to ERISA’s fiduciary standards. Plan fiduciaries are responsible for selecting and monitoring the trustee, ensuring annual independent valuations of company stock, and overseeing diversification options when participants become eligible. ESOPs must file Form 5500 and distribute summary plan descriptions (SPDs). Failure to comply with these rules can lead to penalties and fiduciary liability.
Prevalence and Impact
ESOPs are widespread: as of 2023, there are roughly 6,700 ESOPs covering about 14 million employees and representing $1.3 trillion in assets. They are especially common in manufacturing, professional services, and family-owned businesses seeking succession solutions. For organizations looking to cultivate a culture of ownership, ESOPs stand out as a powerful tool that benefits both employers and staff.
6. Simplified Employee Pension (SEP) Plans
A Simplified Employee Pension (SEP) plan is a straightforward, employer-funded retirement solution that lets businesses set up individual SEP IRA accounts for each eligible employee. Unlike more complex plans, SEPs shift the entire contribution responsibility to the employer, providing a simple structure that scales with your workforce.
Eligibility and Mechanics of SEP
To adopt a SEP, an employer must invite all employees who meet basic age and service criteria—typically age 21 or older and having worked for the company in at least three of the last five years. Once enrolled, each eligible worker receives a separate SEP IRA at a financial institution of their choice. Employers contribute directly to these IRAs, and employees manage their own investment mix.
Contribution Limits and Flexibility
For 2025, employers can contribute up to 25% of each participant’s compensation, capped at $66,000. There’s no requirement to fund the plan every year, so businesses can adjust contributions based on cash flow or profitability. This “fund-when-you-can” feature makes SEPs especially appealing to seasonal or startup ventures that need room to breathe.
Advantages for Small Businesses
SEP plans are prized for their minimal paperwork. There’s no annual Form 5500 filing or nondiscrimination testing, and setup costs are negligible—often just filling out IRS Form 5305-SEP. By outsourcing day-to-day administration to your financial institution or TPA, you can focus on running your business rather than wrestling with compliance checklists.
Tax Implications for Employers and Employees
Employer contributions to SEP IRAs are fully tax-deductible, reducing taxable income in the year they’re made. From the employee’s perspective, all contributions and investment earnings grow tax-deferred until withdrawal. Note that employees themselves can’t defer salary—only the employer makes deposits—but the tax-deferred growth still delivers powerful long-term savings potential.
Adoption Rates and Average Balances
SEP plans are surprisingly popular: about 950,000 are in force across the U.S. On average, employers contribute roughly 12% of salary for participants, and the typical SEP IRA balance sits near $35,000. For small businesses looking to offer a valuable retirement benefit without the heavy lifting, SEPs strike a winning balance of simplicity, flexibility, and tax efficiency.
7. SIMPLE IRA Plans
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement plan tailored for small businesses with 100 or fewer employees. It combines employee salary deferrals with mandatory employer contributions, offering a straightforward and cost-effective way to help staff save for retirement. SIMPLE IRAs strike a balance between richer benefits than a basic IRA and lighter administrative demands than a full-blown 401(k).
Eligibility and Participation Requirements
To qualify, an employer must have no more than 100 employees who each earned at least $5,000 during the preceding calendar year. Eligible employees are those age 21 or older who earned at least $5,000 from the employer in any two prior years and expect to earn the same in the current year. Once enrolled, participants can begin deferring salary immediately, and there’s no waiting period beyond meeting those basic service and age thresholds.
Contribution Structures
SIMPLE IRAs offer two employer contribution options:
- A matching contribution of up to 3% of each employee’s compensation, with the employer’s match limited to 3% of pay.
- A flat 2% non-elective contribution for all eligible employees, regardless of whether they defer salary.
For 2025, employees may defer up to $16,000 of their salary into a SIMPLE IRA. Participants age 50 and over can make an additional catch-up contribution of $3,500. These limits are lower than those in 401(k) or SEP plans, which can be a drawback for owners or high-earning employees.
Administrative Simplicity and Costs
One of the biggest draws of a SIMPLE IRA is its minimal paperwork. Employers set up the plan by completing IRS Form 5305-SIMPLE and distributing it to each participant. There’s no annual Form 5500 filing, no nondiscrimination testing, and no requirement for a fidelity bond. Most financial institutions or TPAs handle account setup and ongoing recordkeeping, often with no or very low plan administration fees.
Limitations and Employer Considerations
While SIMPLE IRAs reduce administrative burden, they come with trade-offs. Contribution limits are lower than those in 401(k) or SEP plans, which can be a drawback for owners or high-earning employees. Moreover, employers must make contributions each year—either the 3% match or 2% non-elective payment—regardless of profitability. Businesses should budget for this annual outlay to ensure compliance and avoid potential penalties.
Adoption Rates and Usage Statistics
SIMPLE IRAs remain popular among small businesses seeking a straightforward retirement benefit. Approximately 400,000 SIMPLE IRA plans cover over 2 million participants nationwide. On average, employers match about 3% of employee salaries, delivering a valuable incentive that bolsters recruitment and retention in the small-business sector.
8. Profit-Sharing Plans
A profit-sharing plan lets employers make discretionary contributions to employee retirement accounts based on company profits. Rather than a fixed formula, contributions can vary year to year—and employers decide how much to allocate within IRS limits. By tying contributions to profitability, these plans align employee rewards with business performance, creating a powerful incentive for everyone to work toward shared goals.
Determining Contribution Amounts
There are two common methods to allocate profits:
• Pro rata allocation: Every eligible employee receives the same percentage of pay.
• Integrated comparability: Contributions are “integrated” with Social Security wages, allowing higher allocations for key employees.
For example, if your total payroll is $1,000,000 and you choose a 5% profit-sharing contribution, you’d fund a pool of:
Total profit-sharing pool = Payroll × Contribution Rate
= $1,000,000 × 5%
= $50,000
Under a pro rata approach, an employee earning $50,000 would receive $2,500 (5% of salary). Integrated comparability can boost allocations for certain groups, but requires careful nondiscrimination testing.
Flexibility in Funding and Timing
One of the biggest perks of profit-sharing is the annual flexibility. Employers typically have until the tax-filing deadline (plus extensions) to adopt or amend their plan and make contributions for the prior year. This “decide late” feature means you can fund a profit-sharing plan when cash flow is strong—without locking in a fixed contribution during leaner months.
Profit-sharing plans often integrate seamlessly with 401(k) or other defined contribution arrangements, letting you offer employee deferrals alongside discretionary employer credits. That combination can maximize tax benefits and boost overall retirement savings.
Tax Benefits and Alignment with Business Performance
Employer contributions to a profit-sharing plan are tax-deductible, reducing taxable income in profitable years. By scaling contributions to performance, your tax deductions ebb and flow with your bottom line. At the same time, employees see firsthand how company success translates into retirement savings, reinforcing a sense of ownership and shared purpose.
Compliance Requirements and Integration
When paired with a 401(k), a profit-sharing component must pass nondiscrimination tests (ADP/ACP or actual deferral percentage testing) to ensure allocations don’t favor highly compensated employees. All plans with more than $250,000 in assets must file Form 5500 annually, due by the last day of the seventh month after the plan year ends. Extensions can be secured via Form 5558. Accurate recordkeeping and timely filings are essential to avoid penalties.
Adoption and Best Practices
Roughly 25% of small businesses offering retirement benefits include a profit-sharing feature. To make the most of this option:
- Review your business’s profitability cycle and choose a contribution window that aligns with cash flow.
- Work with a TPA to design allocation formulas and comply with nondiscrimination rules.
- Communicate clearly with employees how contributions are determined to strengthen engagement.
Case in point: A mid-sized manufacturer with $2 million in annual payroll allocated 5% to profit sharing—creating a $100,000 pool. Employees saw contributions that mirrored the company’s strong year, reinforcing teamwork and loyalty while delivering a meaningful retirement boost.
Getting Started with Your Retirement Plan Decision
Now that you’ve explored the eight major retirement plan options, it’s time to zero in on the right fit for your organization. Start by weighing:
- Company size: A SIMPLE IRA or SEP IRA may be perfect if you have a small, tight-knit team, while larger employers often leverage 401(k)s, cash balance plans, or profit-sharing arrangements to maximize benefits.
- Budget and goals: Determine how much you’re willing to contribute annually. Cash balance and profit-sharing plans allow more generous tax-deductible contributions, whereas SIMPLE IRAs and 403(b)s cap savings at lower thresholds.
- Administrative bandwidth: Ask yourself whether you want minimal paperwork—SEP and SIMPLE IRAs require virtually no testing or Form 5500—or if you’re prepared for the complexity of nondiscrimination testing, plan audits, and ERISA filings that come with 401(k)s and ESOPs.
- Employee demographics: Match plan features to your workforce. If you have seasoned staff who need to catch up quickly, special provisions in 457(b) or 403(b) plans can be a game-changer. Younger employees might value Roth options and easy rollovers.
No single plan is perfect for every employer. Higher contribution limits and richer benefits often carry steeper compliance demands and administrative costs. On the flip side, simpler plans keep setup and ongoing management straightforward but may not deliver the savings your team needs.
That’s where a trusted partner makes all the difference. Working with an experienced third-party administrator and fiduciary can streamline the entire process—from plan design and compliance testing to Form 5500 filings and ERISA consulting. You’ll protect your business from liability, ensure your plan stays in line with regulations, and free up time to focus on what you do best.
Ready to get started? Let Summit Consulting Group guide you through every step—from selecting the ideal retirement plan to handling the ongoing administration and fiduciary duties. Visit our homepage to explore how our professional plan administration and fiduciary support can simplify retirement for you and your employees.
