There are no shortcuts when it comes to retirement. Planning appropriately requires thoughtful strategy, saving money, and, for many, participating in an employer-sponsored retirement plan. Defined contribution plans, like 401(k)’s, have become the most popular employer-sponsored plans in America – with more than 55 million workers participating in their company’s 401(k) plan. An employer-sponsored 401(k) plan is one of the easiest, most convenient, and valuable components of any company’s compensation and benefits package. Help your employees and managers understand the ins and outs of retirement planning by learning the ABCs of retirement.
A 401(k) is a defined-contribution employer-sponsored retirement plan. Funds are taken out of the employee’s current payroll on a regularly defined basis and deposited into their 401(k) fund. These pre-tax deductions allow individuals to contribute to their future retirement while offering significant tax advantages for both the employer and the employee.
Investments in the 401(k) account grow tax-free until an employee begins receiving benefit payments. Read Help Your Employees Prepare for Retirement to learn more about 401(k)s and other retirement accounts.
Auto-enrollment and auto-increase
Many companies opt to take the guesswork out of saving for retirement by automatically enrolling employees in their employer-sponsored retirement plan. Auto-enrollment allows employees to begin saving for retirement as soon as they meet the plan’s eligibility requirements.
Employers may even opt to auto-increase the contribution rate at certain milestones, such as work anniversaries, to help employees meet their retirement goals. Even if the employer doesn’t offer an auto-increase feature, it’s important for employees to gradually increase their contributions to help them meet their long-term retirement needs.
Contributions are the amount that the employee deposits into their retirement account. The IRS places maximum contribution limits on 401(k) plans, with annual changes to account for inflation. For 2019, the maximum contribution for employees under 50 is $19,000; those over 50 may make a maximum contribution of $25,000 which includes a $6,000 maximum catch-up contribution. Read 401(k) Contribution Limit Increase for 2019 for more information on retirement plan contributions.
For many employees, one of the most attractive features of a 401(k) is the opportunity for employer contribution matches. Not all companies opt to match employee contributions, but many decide to match their employees’ contributions up to a certain amount, based on the employees’ own annual contribution.
For example, if your current contribution is 3%, your employer may match some or all of that contribution. The maximum contribution limits for 401(k)’s do not include the employer match, meaning that employer matching provides employees with the opportunity to grow their retirement savings even more.
Retirement plan enrollment eligibility varies by company. While some companies allow employees to sign up for the retirement plan on their first day, others may require a waiting period of 90 days, six months, or even a year.
Employers with a waiting period should identify the eligibility date of each employee and notify them during the weeks leading up to that date and again on the date of eligibility. The earlier employees begin saving, the more money they will have at retirement.
Vested is a term used to describe the portion of a retirement account that the employee can take with them when they leave an employer. Any contributions that the employee makes from their paycheck (and investment earnings on those contributions) are always 100% vested and cannot be forfeited for any reason.
Retirement plans are designed so that employees gradually become more vested in the plan based on years of service, meaning that over time the employee can take 100% of the plan funds with them when they leave, including their employer’s contributions.
Plan administration you can trust
Selecting the right retirement plan for your company and employees can be a daunting task for many businesses – that’s where we come in. Sheakley Retirement provides individual retirement account support for small to medium-sized employers. It starts with a consultative meeting to determine the plan design that best meets the needs of the company and its employees. Then we’ll manage the retirement planning services, ensuring a simple, efficient and successful 401(k) profit sharing plan or other retirement program.
Learn more about Sheakley Retirement and contact us for your free consultation today. Stay up-to-date on all things Sheakley by subscribing to our blog and following us on social media. Join in the discussion by commenting below.