Being able to provide a 401(k) for your employees can bring a sense of pride to smaller businesses and is generally expected of larger enterprises. However, it’s often one of the most misunderstood employee benefits by HR professionals and employees alike. If your company offers a 401(k) retirement plan, it’s important to be familiar with the myths and misconceptions of them, so you can be certain they’re getting the most they can from the program.
Those who manage funds don’t do so out of the kindness of their hearts, nor do they count their blessings they got to hold onto the money for a period of time. Management fees are broken up in a number of ways, and they’re often not even broken down for account holders on their regular statements. Do you know the exact amount employees are paying to manage their retirement savings plans? Probably not, as around 80% of people have no clue what they lose in fees every year. The good news is, you can find out if you’re prepared to do some legwork, and if the rates are not competitive, you can change to a plan that’s better for your employees. For more information on sizing up your company’s 401(k) fees, see Kiplinger’s “The High Cost of 401(k) Fees: How Much Are You Paying?”
Around 20% of people exercise the option to pull money out of their retirement accounts early, but this is almost never a good idea. “If the idea of taking a loan from your 401(k) plan crosses your mind, stop and think before you act,” says Investopedia writer Lisa Smith. “Instead of short-changing your future to finance your lifestyle today, consider re-evaluating your current lifestyle instead.” There are any reasons not to pull money out, including heavy fees and taxes, but she contends that the biggest reason is that it violates the golden rule of finance: “Pay yourself first.” Don’t live above your income, and contribute to an emergency savings to take care of today’s needs before trying to build for tomorrow.
The old adage is to “Save every penny you can,” but that doesn’t provide an actionable goal. It’s estimated that people entering the workforce now will need a million dollars to live comfortably, though the actual amount will vary based on one’s income now and whether the person wants to maintain his present lifestyle. A report from CNBC suggests that by age 35, employees should have twice their annual salary set aside. By 40, they should have three years saved. With many employers auto-enrolling people at the lowest amount, many don’t realize they can, and should, increase the amount they’re saving.
Many employers don’t realize this, but they can offer their employees Roth 401(k)s. The big difference here is that the money it’s taxed up front, which may be advantageous for younger employees. The benefits will vary based on the individual’s future earning potential. If he’ll be in a higher tax bracket come retirement, it’s better to have the taxes taken out now, rather than waiting.
If you knew the points made in this blog before reading, please be sure to pass the information on to your employees. If you learned new things, it may be time to discuss your employee benefits packages with the experts at HR Source. We can help make sure you have the best possible offerings for your employees and help devise training manuals, so they can make the most of them. Call us for more information today.
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