In spite of recent history in the stock market, when you compare 401(k) plans to other savings plans available to employees, the 401(k) plan has many positive points. Here are ten reasons your employees should participate.
1 – They won’t miss it. When the contribution is automatically deducted, most workers don’t write a check. Therefore they don’t see or miss the difference. And if employees enroll using a percentage of their pay, if they receive a raise, they also receive a raise for their plan.
2 – They’ll receive free money with your employer match. Studies show that more than 70 percent of plans offer some kind of matching contribution. The employer match escapes Medicare payroll taxation completely, and for those below the social security wage base, it also escapes Social Security tax completely. Combined, that’s an additional 7.65% guaranteed return!
3 – They’ll save on taxes, twice. First, 401(k) contributions are not counted toward employees’ gross income for the year. Second, the contributions grow tax-deferred, and earnings are not counted as taxable income until withdrawn.
4 – Gain exponential growth through compound interest. The 401(k) becomes a powerful savings tool as the contributions, original principal and interest mount over time. Although the short term gains may seem small, employees will see exponential results over the long haul.
5 – Steady purchases over time allow them to buy low, sell high. By default, 401(k) savers tend to have lower cost per share, because they make steady purchases from each paycheck.
6 – Take advantage of higher contribution limits versus an IRA. A participant in a 401(k) plan can contribute up to $16,500 tax-deferred (or $22,000 if they are 50 or older). Comparatively, individuals may only contribute up to $5,000 to an IRA ($6,000 if 50 or older).
7 – Obtain a professionally-managed, diverse portfolio for less. For an individual to develop the same broad portfolio on their own that they receive from their 401(k), he or she may need to invest more, take more time to manage the funds and may also incur higher fees. With the 401(k), most of the legwork is already done.
8 – Funds may be available in an emergency. Many 401(k) plans offer loans or hardship withdrawals that allow participants to receive money in an emergency. However, because the funds were designed for retirement use, early withdrawal comes with big consequences that should be thoroughly investigated.
9 – 401(k) funds are portable. If a participant changes jobs, he or she can roll over the savings into a new employer’s plan or into an IRA.
10 – Social Security won’t be enough. Many financial planners suggest retirees will need between 70 and 90 percent of their pre-retirement income to live comfortably in retirement, and Social Security is expected to provide a modest percentage. Future retirees will need additional income sources in retirement.
All the recent studies conclude that employees are not saving enough to adequately replace their paychecks in retirement. Consider sending annual gap reports to your employees that illustrate the amount of income replacement they will need compared to the amount they currently have saved – the difference is the gap. These reports are readily available and not expensive. Your plan’s record keeper can provide the information needed. Consider adding participant investment advisory services as part of the gap reports. These services should be provided by a plan investment fiduciary and will result in a better long-term investment return with less risk.
If you haven’t reviewed your retirement plan lately, your accounting professional will have many ideas that may help you make improvements that can make the plan more attractive to your employees, better ensure it meets ERISA fiduciary requirements and that it works to better meet the needs of your company. Ask your accounting professional for additional details about these services. We can work with plan sponsors in a number of different capacities.