How to Explain the 401(k) To Your Employees

How to Explain the 401(k)To Your Employees

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Session ObjectivesIdentify benefits of participating in a 401(k)Understand investment optionsExplain the plan’s rulesAnswer questionsHelp employees make informed choices


Prequiz:Test Your Knowledge

a. Flexible savings plan

a. 65

a. Allowed

a. Vested

1. A 401(k) is a:

3. Earliest penalty-free distribution age is:

4. Borrowing from a 401(k) is:

b. Retirement plan

b. Taxed

b. 591/2

b. Not allowed

2. Employer contributions belong 100% to employees only after they are:


What’s a 401(k)?401(k)—n. a special employee savings and investment plan that offers pretax contributions and tax-deferred earnings; an employee-funded retirement plan


What are the Advantages of a 401(k)?Tax-

deferred earnings

Reduction in current gross income

Automatic payroll deductions

Control of account


More Advantages• Portability• No minimum

investments• Loan options• Matching funds


Who Is Eligible to Participate?

Eligibility = Employee + 21 yrs old +

time-in-employment requirements


How Much Can Employees Invest?• Maximum

contributions• Vesting rules


When Should Employees Start Investing?

Example 1: Tom is 45 years old when he starts contributing:

Annual salary $20,000Annual contribution 6%Average annual return 7%Years of work before retirement 20Employer contribution 0

Retirement savings $52,397


When Should Employees Start Investing? (cont.)

Example 2: Karen is 25 years old when she starts contributing:

Annual salary $20,000Annual contribution 6%Average annual return 7%Years of work before retirement 40Employer contribution 0

Retirement savings $264,012


Can Employees “Catch Up” If They Start Late?• Age 50 or older• Separate written

election• Employer obligations


How Are 401(k) Contributions Handled?

Employee accounts

Employee shares

Investments

Trust fund

Employee contributions


What Are the Investment Options?

Stable value fundsEmployer stockMutual FundsMoney market fundsBond funds


Balanced fundsStock index funds

What Are the Investment Options? (cont.)

Growth and incomefundsGrowth fundsAggressive growthfunds

International and global equity funds


Can live with some ups and downs because I have some time for my money to grow (Moderate)

Want the highest possible long-term return and I’m not afraid of taking risks (Aggressive)

Don’t want to risk principal and want a guaranteed return on investment (Conservative)

What Type of Investor Are You?


401(k) BasicsDo you understand:• What a 401(k) is?• Advantages?• Eligibility?• Contribution rules?• How contributions

are invested?• Investment options?


How Can Workers Choose The Best Investments?

“Before you invest, investigate.”—William Arthur Ward


What’s the Ideal Mix of Investments?

25 to 34 25% 60% 5% 10%35 to 44 20% 60% 10% 10%45 to 54 15% 60% 15% 10%55 to 64 15% 45% 30% 10%

Growth Conservative Age Stock Stock Bonds GIC

25 to 34 25% 60% 5% 10%35 to 44 20% 60% 10% 10%45 to 54 15% 60% 15% 10%55 to 64 15% 45% 30% 10%


How Do 401(k)s Compare with IRAs?

401(k)

Yes, but much higher than IRA

Payroll deduction

Yes, matching

Immediate

Income averaging on lump sums; IRA

rollover possible

IRA

Yes, about 1/3 of 401(k)

Must make deposits

None

After tax return filed

None

LIMITS

DEPOSITS

EMPLOYER CONTRIBUTIONS

TAX SAVINGS

TAX TREATMENTON DISTRIBUTION


What About Workers Who Leave Before Retiring?If an employee leaves• All own contributions• Vested $$• Rollover rights

If an employee dies• All $$ vest• $$ to named beneficiary


What About LoansFrom the 401(k)?• Qualifications• Minimums and

maximums• Repayment• Separation


When Are Funds Normally Distributed?• Employee leaves

organization • Employee totally and

permanently disabled• Employee dies• Plan is terminated


Taxes

What If Employees Withdraw Money Early

Penalty


What Are “Hardship” Withdrawals?• Immediate and

necessary need• No other resources • Only from employee

contributions• No contributions for

6 months • Taxes must be paid


Are There Any Disadvantages to 401(k)s?

No insurance

Vested values

Employer can amend at any time

Unwise investing

Market downturns

Spending before retirement


Review: Which Are 401(k) Features?

Loans

Insured investments

Diversification

Employee contributions subject to vesting

No taxes on withdrawals

Matching contributions


401(k) FeaturesDo you understand:• Portfolio

diversification?• 401(k)s vs. IRAs?• Normal distributions?• Loans and other early

withdrawals?• Disadvantages?


Key Points to Remember401(k)s can be an excellent way to save for retirement

Employees are responsible for investments

They should be informed about the plan and investments

Wise investors diversify

Documents

How to Explain the 401(k) To Your Employees