This is the one mechanism in America today, with the exception of mortgage interest, that allows you to protect your income from taxes. But, most importantly perhaps, it enables you to be competitive in recruiting good employees. A deferred compensation plan gives employees a stake in the employer's future. It will boost morale, increase productivity and improve workers' attitudes. Second, for the employer, it can be a tax-planning tool.
Contributions are tax-deductible if the employer is making a contribution to the plan.
Within the plan, investments grow on a tax-deferred basis. By contrast, a simple investment in a mutual fund, for example, is taxed, but a retirement fund is not taxed until the retiree draws from it. A recent survey indicates that, for most Americans, a post-retirement income is approximately 40 percent of what they make while in the workforce. So, it makes sense to put the money into the retirement fund now at a higher income and withdraw it when in a lower tax bracket. Some of them are funded only by workers' contributions.