In a 2016 401k plan design study of 2,767 small businesses, we found 66% permit participants to make after-tax Roth contributions to their personal account. I think it’s safe to assume the high adoption rate of this 401k plan feature is due to participant demand.
401k plans offer important tax advantages for small businesses and their employees. If you are a business owner, you should understand these benefits when deciding whether or not to offer a 401k plan to your employees. Too many businesses focus on “what is this going to cost me,” rather than, “what are the benefits?” While we strongly recommend always speaking with your accountant on the topic of taxes, here is a high-level summary of the tax benefits possible by offering a 401k plan.
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Saving for retirement is one of the most important things we must do during our working years. After all, nobody can work forever and living expenses don’t stop after you stop earning a paycheck. And yet too many of us aren’t saving enough for retirement. Why is that? For workers that can afford to save, I think the number one reason is the inability to cut through the complexities of saving and investing. Today, workers must answer complicated questions to successfully participate in a 401k plan. I believe these questions scare a lot of workers away from giving their savings enough thoughtful consideration.
Most people consider $100,000 a lot of money – I do anyway. But is it a lot of money when you’re saving for retirement? The short answer is it depends upon how old you are. A 30 year-old with a $100,000 nest egg is likely on track for a comfortable retirement at age 65 if they’re saving 10%-15% of their income each year, while a 50 year-old with the same nest egg is likely behind in their savings and will need to save much more each year to catch-up in order to retire at 65.
Forty years after the passage of the Employee Retirement Income Security Act - ERISA – it seems like we are far removed from the issues it attempted to address. In 1974 40% of private sector employees were covered by employer-sponsored defined benefit (“DB”) pension plans. These DB plans provided workers with a lifetime income annuity upon retirement. These plans provided a high level of income security – if the employer met funding requirements. However, many of these plans were only partially funded and plan failures were not uncommon. ERISA required tighter funding requirements for these plans, thus improving workers’ income security. A more fully funded plan was more likely to meet future obligations.
I was talking with a long-time client yesterday about how best to communicate with his rank-and-file employees. He operates retail food stores, and most of his employees are hourly and work for wages toward the lower end of the scale. We worked through a series of actions any plan sponsor can take to help get employees to participate – and build wealth.