Even though 401(k) retirement plans for the most part are relatively safe, there are number of disadvantages:
First of all, companies must choose what stocks people will be able to invest in with the plan. The main disadvantage here is that the company is legally responsible for this. If the employer makes some bad decisions that cause the employee to lose their savings, then they are looking at a lawsuit as well as a bad reputation for their company. However, the company can elect a plan trustee who in turn can work with a professional investment advisor and together go over the companies choices and determine the best options.
Over half the 401(k) plans allow people to borrow from the plan with a figure of about 25% of people taking advantage of this option. Once again it is up to the employer to choose if this option will be included in the plan. It is the employer who will also have to decide the terms of the loan. This can put some burden on the employer and may require them to hire another employee to handle the loans. This adds a cost to the company and is definitely a disadvantage.
One other problem with a 401(k) pension plan is that the features of the plan can taint the need for employees to provide for their retirement, because under certain conditions, the money can be loaned or distributed in hardship situations. This could give your employees false sense of security and they could blame it on your company when they realize that they are not going to be able to meet retirement needs
As one can see , the main disadvantage to the employer is all the choices that go into making a 401(k) retirement plan. If you make bad choices when compared to the competition, you make yourself less attractive to potential talent.
Record keeping can be a very big disadvantage to an employer offering the 401(k) retirement plan. The cost can become very high and requires the organization to hire new employees to handle this job, not to mention that if they mess up somewhere it could cause many problems. They might lose some of the employee’s money, or give them more than they should have. The problems that could occur are endless. Another disadvantage that is related to record keeping is you must perform a yearly non-discrimination test. This test is run to make sure that your 401(k) plan does not discriminate in any way at all. There are also some disadvantages to the employee. These must be looked over before deciding whether or not to take part in investing in a 401(k) plan.
Unfortunately 401(k) retirement plans are not backed by any insurance, and that means the contributing employee could ultimately lose all their 401(k) holdings. This, however, is very unlikely considering that most 401(k)s are diversified. By diversity, one is referring to the number of different holdings within the 401(k) that are required. The Federal government requires that employer’s give all employees at least three choices in which they can invest, not including the company for which they work. Thus, most 401(k)s are safe, unless an investor/employee has contributed an extensive amount to one particular company. Say for instance that the employee has contributed a large part of his or her savings towards the company in which they work.
If that company happens to go bankrupt, or fail, that employee has lost a large portion of his/her retirement. In a worse case scenario, like the one mentioned above, one might be a little hesitant when it comes to investing in a 401(k) plan. However, one has to also consider that nearly every money market has its own similar risk. The important thing to remember, when investing, diversify among investments. Financial investors recommend investing in stocks, bonds, and T-bills.