The convenience of 401ks also means less direct involvement and possibly less worry. One alternative to tax deferred accounts, like IRAs and 401ks, is to have a straight investment in the market itself. Some employees may think they can RobinHood their way into sufficient retirement savings. Yet, most employees cannot manage, or are not willing to engage in, the day-to-day administration of that kind of account. Many, if not all, employees will need the tax advantages a 401k offers.
Many Americans have access to retirement benefits through their workplace but may not know how to optimize these benefits. Sometimes, it’s helpful for plan sponsors to review the basics of just how those benefits work and what they mean. Other times, plan sponsors may face backlash from employees frustrated with 401(k) performance. There is never a bad time for plan sponsors to review the basics of 401(k)s and other company retirement benefits.
As to the basics, the 401k is still the most convenient and useful of company retirement benefits. The basic 401k ranks high on convenience since it requires little from and employee in terms of input and can exist forever on automatic deductions from payroll. Most 401ks have the benefit of allowing employees to choose groups of funds and match funds to their own risk tolerability levels. There are a few drawbacks to 401(k), including difficulty in divesting from companies that employees may feel are not ethically sound and automatic deductions of set amounts don’t always account for increases in salaries over time, or decreases in salaries with changes in a family needs. And, for the rare employee, the maximum contribution limit might be too low.
But the news often focuses on the bad more than the good. The conflict in public opinion on 401ks appears to be over whether 401ks are getting the job done. Some political pundits have been asserting that defined benefit plans, with their guaranteed benefits and low risk, are a better retirement investment plan than 401ks, with their guaranteed contribution, but higher risk and potentially higher costs through fees. And, research by economists claims that the retirement savings of Americas are about 25% lower than needed. Recent lawsuits over plan fees and limited options may have employees thinking their 401k options may be unfair or harsh without fully understanding the regulatory and compliance requirements involved.
A “401k” refers to a section of the tax code that allows money to be taken out of paychecks and added to employer sponsored retirement accounts. It’s less of a mouthful to refer to this kind of account than by its longer name. An IRA refers to an individual retirement account.
While they may need a new PR agency, the twin benefits of convenience and usefulness continue to trump other investment products. The 401k option allows for greater amounts of investing than IRAs. While an IRA may provide slightly more flexibility and liquidity, the maximum contribution limit might not be enough to reach an employee’s retirement goals. And an IRA’s catch up amount, an amount allowed by the IRS to those over age 50 to increase retirement funds, is lower than that for 401ks. And not all IRAs are the same: there are important tax differences between a traditional and Roth IRA.
The convenience of 401ks also means less direct involvement and possibly less worry. One alternative to tax deferred accounts, like IRAs and 401ks, is to have a straight investment in the market itself. Some employees may think they can RobinHood their way into sufficient retirement savings. Yet, most employees cannot manage, or are not willing to engage in, the day-to-day administration of that kind of account. Many, if not all, employees will need the tax advantages a 401k offers.
With all of that said, many plan sponsors are working hard to offer other retirement products in their benefits portfolios so that they can meet their employees needs for both security and flexibility. That usually involves a mix of 401ks, IRAs, and brokerage accounts that may meet a client’s need for security and flexibility. To help achieve that need, plan sponsors have been including annuities into some of their portfolios.
Many employees also do not understand how Health Savings Accounts (HSAs) work and how to use them. It’s estimated that Medicare will only cover about 60% of an employee’s health care needs in retirement. That leaves 40% of the costs for them to cover on their own. Some estimates place the amount that the average 65 year old retiring couple may need to cover health care costs anywhere between $200,000 and $250,000.
HSAs allow an employee to contribute pre-tax dollars, grow the assets without taxes on income, and deduct assets for medical expenses. An HSA allows the amount not used for healthcare to continually build. The tax savings on contributions to an HSA in some circumstances may be greater than a similar contribution to a 401(k). The rules regarding HSAs do allow for a catch up or additional contribution though it is capped in a way similar to IRAs.
Additionally, use of an HSA is not limited to the account holder; deductions from an HSA can be made tax-free for spouses and dependents of the account holder. And, what qualifies as a health expense may be broader than what an insurance plan covers with copays. This includes eye care, like contact lenses and eyeglasses as well as laser eye surgery, and physical therapy, as well as chiropractic care and acupuncture.
Plan sponsors have also begun to add a few new features to their employee benefits that impact retirement savings in a tangential way. Funds set aside for emergency accounts can be automatically deducted from payroll, helping clients who may have otherwise needed to borrow from 401ks. For the same reason, many plan sponsors and employers are also increasing the short term disability options they offer employees. So too for pet insurance, a benefit some employers are adding to help employees avoid unexpected debt from a catastrophic pet accident.
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
get xpress proposal
