In today’s workforce, there are more and more employees participating in 401(k) plans. In 2014, there were approximately 94 million workers enrolled in Defined Contribution plans, most of those in 401(k) plans. Though there has been criticized throughout their history, 401(k) plans are the primary retirement savings accounts for most Americans, has benefited both the employees as well as the employers in tax savings and building towards a successful retirement.
In general, the 401(k) retirement plan offers various kinds of investment options, which can also include lower fund expenses and management fees that may be available to individual investors. There are also several features such as automatic enrollment, low-cost index funds, catch-up contributions for employees who are near retirement and higher contribution limits than are allowed in individual accounts.
The best benefit of the 401(k) plan is that it has several provisions for tax savings which are present in the contributions as well as the earnings. Traditional 401(k) retirement plans allow employees to save money for their future and make pre-tax contributions for their retirement, allowing those investments to grow tax-free. When money is drawn from the account in retirement, the employee pays taxes on those withdrawals.
More recently, ROTH contributions have been added to many 401(k) plans so employees can pay taxes on their retirement investments now, and allow them to grow tax-free and in retirement, they can withdraw the funds without taxes as long as certain rules are followed. Including the fact that the contributions are made from employees’ paychecks, making it an easy approach for employees to save, there is a reason it is one of the most popular ways for America to save for retirement.
Some of the benefits of a 401(k) plan are –
- It helps to create a safe retirement account to save for your future expenses. Using a 401(k), one can successfully save up for retirement and this money can be invested in a diverse portfolio to grow your savings even further.
- To start saving in a 401(k) plan, an employee only has to contribute a very small amount to open their account, normally only $1 or more.
- While you do not have to offer the plan to employees under the age of 21, the younger employees start to save, the more easily and earlier they can meet their retirement goals.
- These plans offer significant tax advantages to businesses of all sizes. Whether a small firm, where the company is looking to save on taxes, to a large company looking to reward and retain employees, many business goals can be accomplished in a 401(k) plan.
- Most 401(k) plans have easy-to-choose investment options like Target Date funds, which allow employees to make investment decisions once, and the fund allocates itself appropriately as the employee nears retirement.
- Also, many plans have access to these savings when an emergency occurs, such as loans which may not need a specific reason to qualify for depending on your employer, to hardship withdrawals that can be taken for eviction, college tuition, uninsured medical expenses, purchase of a principal residence, funeral expenses and even damage to one’s principal residence.
Whether a small business owner or someone in the human resources field, it should already be well known the importance a 401(k) plan for both the health of the company and for its employees. The key to any plan though is making sure it is tailored to the specific goals of the company. Far too many 401(k) providers take a cookie cutter approach instead of designing the 401(k) plan for each client, and this may not only hinder a company from having the plan meet its goal, but can also have unintended consequences when not done properly. That is why it is so important to work with providers that specialize in the field and can address issues before they arise, such as Life, Inc. Retirement Services.
Life Inc. Retirement Services 