Are Your Employees Ignoring Their 401(k)s?

For many businesses, offering employees a 401(k) plan is no longer an option — it’s a competitive necessity. But employees often grow so accustomed to having a 401(k) that they don’t pay much attention to it.

It’s in your best interest as a business owner to buck this trend. Keeping your employees engaged with their 401(k)s will increase the likelihood that they’ll appreciate this benefit and get the most from it. In turn, they’ll value you more as an employer, which can pay dividends in productivity and retention.

Promote positive awareness

Throughout the year, remind employees that a 401(k) remains one of the most tax-efficient ways to save for retirement. Regardless of investment results, the pretax advantage and any employer match make a 401(k) plan an ideal way to save.

Encourage patience, involvement

The fluctuations and complexities of the stock market may cause some participants to worry about their 401(k)s — or to try not to think about them. Regularly reinforce that their accounts are part of a long-term retirement savings and investment strategy. Explain that both the economy and stock market are cyclical. If employees are invested appropriately for their respective ages, their accounts will likely rebound from most losses.

If a change occurs in the investment environment, such as a sudden drop in the stock market, present it as an opportunity for them to reassess their investment strategy and asset allocation. Market shifts have a significant impact on many individuals’ asset allocations, resulting in portfolios that may be inappropriate for their ages, retirement horizons and risk tolerance. Suggest that employees conduct annual rebalancing to maintain appropriate investment risk.

Offer help

As part of their benefits package, some businesses provide financial counseling services to employees. If you’re one of them, now is a good time to remind them of this resource. Employee assistance programs sometimes offer financial counseling as well.

Another option is to occasionally engage investment advisors to come in and meet with your employees. Your plan vendor may offer this service. Of course, you should never directly give financial advice to employees through anyone who works for your company.

Advocate appreciation

A 401(k) plan is a substantial investment for any company in time, money and resources. Encourage employees to appreciate your efforts — for their benefit and yours. We can help you assess and express the financial advantages of your plan.

Finding a 401(k) that’s Right for Your Business

By and large, today’s employees expect employers to offer a tax-advantaged retirement plan. A 401(k) is an obvious choice to consider, but you may not be aware that there are a variety of types to choose from. Let’s check out some of the most popular options:

Traditional. Employees contribute on a pre-tax basis, with the employer matching all or a percentage of their contributions if it so chooses. Traditional 401(k)s are subject to rigorous testing requirements to ensure the plan is offered equitably to all employees and doesn’t favor highly compensated employees (HCEs).

In 2018, employees can defer a total amount of $18,500 through salary reductions. Those age 50 or older by year end can defer an additional $6,000.

Roth. Employees contribute after-tax dollars but take tax-free withdrawals (subject to certain limitations). Other rules apply, including that employer contributions can go into only traditional 401(k) accounts, not Roth 401(k)s. Usually a Roth 401(k) is offered as an option to employees in addition to a traditional 401(k), not instead of the traditional plan.

The Roth 401(k) contribution limits are the same as those for traditional 401(k)s. But this applies on a combined basis for total contributions to both types of plans.

Safe harbor. For businesses that may encounter difficulties meeting 401(k) testing requirements, this could be a solution. Employers must make certain contributions, which must vest immediately. But owners and HCEs can maximize contributions without worrying about part of their contributions being returned to them because rank-and-file employees haven’t been contributing enough.

To qualify for the safe harbor election, the employer needs to either contribute 3% of compensation for all eligible employees, even those who don’t make their own contributions, or match 100% of employee deferrals up to the first 3% of compensation and 50% of deferrals up to the next 2% of compensation. The contribution limits for these plans are the same as those for traditional 401(k)s.

Savings Incentive Match Plan for Employees (SIMPLE). If your business has 100 or fewer employees, consider one of these. As with a Safe Harbor 401(k), the employer must make certain, immediately vested contributions, and there’s no rigorous testing.

So, how is the SIMPLE 401(k) different from a safe harbor 401(k)? Both the required employer contributions and the limits on participant deferrals are lower: The employer generally needs to either contribute 2% of compensation for all eligible employees or match employee contributions up to 3% of compensation. The employee deferral limits are $12,500 in 2018, with a $3,000 catch-up contribution for those age 50 or older.

This has been but a brief look at these types of 401(k)s. Our firm can provide you with more information on each, as well as guidance on finding the right one for your business.