September 5 is a great day to awaken your
employees to the power of the 401(k) plan.
The Friday after Labor Day is a day to think “401(k)”. The Profit Sharing/401(k) Council of America (PSCA) has created 401(k) Day to help employees across the country appreciate (and use) this fantastic retirement savings tool.
How often do your employees think about theirs? A 401(k) may be the best vehicle an employee will ever have to save money for retirement. But employees often defer very small amounts of salary (say $50 or $100 per month), and some find it a hassle to even fill out the paperwork and participate.
Do they see your 401(k) plan as an opportunity, or an obligation? 401(k) Day is a great day to communicate the value and user-friendly nature of your plan. Your employees need to understand that you are sponsoring a retirement plan - at notable expense - for their benefit. You are giving them the chance to make financial strides - a way to save and build wealth without great impact on their lifestyle, using investment accounts of their choice.
Sponsors need to address three big 401(k) planning mistakes their employees make. One, waiting several years to join the plan. Two, taking a lackadaisical approach to investing because of a lack of financial education. Three, contributing far too little.
Tell them about the tax-deferred compounding. The earlier you start, the more you get. Let’s say an employee defers $75 per paycheck into a 401(k) beginning at age 45; let’s assume that per-paycheck contribution never changes for 40 years, while the 401(k) assets grow at 10% annually. As that employee turns 65, he or she will be looking at about $113,000 in that 401(k). But what if he or she had started deferring that $75 per paycheck at age 25? Under the same hypothetical conditions, that worker would wind up with $876,000 at 65.1
You can put up to $15,500 into a 401(k) in 2008, and if you are 50 or older, you are allowed up to an additional $5,000 in “catch-up” contributions.2 (That $15,500 limit could rise a bit next year, as the contribution limits are indexed for inflation.)
Remind them that they can reduce their taxable income. Many employees don’t realize that 401(k) contributions are subtracted from wages before taxes are withheld (that is, they are “pre-tax” dollars). So when that worker contributes to a 401(k), he or she gets reduced taxable income plus tax-free growth; you pay taxes on 401(k) assets when you withdraw them from the plan.
Please note that with a Roth 401(k), there is no reduction in taxable income as contributions are after-tax, but the employee can still have both tax-free compounding and tax-free withdrawals.
Make the 401(k) top of mind. This year’s 401(k) Day is appealing to three workplace populations that should be using their 401(k) (but sometimes don’t). One, people in their early twenties … people with the longest time horizon until retirement and the greatest potential for their savings to compound. Two, mid-career workers who need to find an “autopilot” way to amass a retirement nest egg as they juggle mortgage, college and family expenses. Three, baby boomers needing to ramp up retirement savings levels.
The message 401(k) Day aims to deliver: whether you’re 25, 35, 45 or 55, you should be participating in your employer-sponsored retirement plan. If you aren’t, you are seriously thwarting your retirement savings potential.
Help your employees take control of their 401(k)! Make sure they understand the value of what you are sponsoring and the choices they have. The simplest, most effective way to do that is to call in a financial advisor. The advisor’s insight and guidance can help employees with financial decisions. If you’re serious about helping your employees attain greater degrees of financial freedom, then arrange a workplace visit from a qualified financial advisor.
Citations.
1 forbes.com/2008/06/09/401k-retirement-college-pf-ii_av_0609youngmoney_inl.html
2 investopedia.com/articles/retirement/04/111004.asp
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