401(k) and 403(b) Retirement Savings Plans

401(k) and 403(b) Retirement Savings Plans

Many employers offer a 401(k) or 403(b) Savings Plan to their employees as a way to save for the employee’s own retirement.  However, employees may choose not to participate because they don’t understand the importance of saving now for the future, are confused about different investments options, or are concerned about the volatility of the market.  These plans can be an excellent benefit to employees to save for their future.  However, employees may need to be educated on why they should participate.  Here are some best practices to consider when communicating your Retirement Savings Plan benefit:

  1. Make sure employees understand the benefit. Inform employees that this money comes out of their pay check on a pre-tax basis.  Since their taxable income is reduced, this may not be as much of a reduction in their pay as what they initially thought.  Does the company offer a matching contribution?  (If so, this is free money from the company that is available to an eligible employee who participates in the plan.)  Does the employer have a length of service requirement (i.e. 3 years with the company, etc.)  to become fully “vested” or completely own the company match portion?  What types of funds can they invest in and what level of risk does each have?  What are the fees associated with the funds?  Are there penalties for early withdrawl?  Can a loan or hardship withdrawl be taken from the plan?  Consider group meetings, one-on-one consultations, written communications or e-mails so that employees may better understand this benefit.
  2. Offer financial education. Consider bringing in a representative from your 401(k) or 403(b) vendor or a licensed financial advisor.  They can discuss how money grows over time, how much money employees may need for retirement, and investment options based upon your current age and risk tolerance.
  3. Consider automatic enrollment.  Employees are enrolled automatically in the company’s retirement savings plan when they first become eligible for the plan.  Employees have the option to change their contribution or opt out of the plan if they wish to do so.
  4. Offer target-date funds. This type of fund takes into consideration the employee’s age and years until retirement.  As the employee approaches retirement age, the investments (which may include a mix of stocks, bonds and money market funds, etc.) become more conservative.
  5. Try to offer a match if possible. If your organization can offer a company match to the employee’s retirement savings plan, it helps to improve employee participation in the plan.  This is extra money that is available to employees if they choose to participate.
  6. Communicate IRS contribution allowances. Employees will be able to contribute up to $18,000 into their 401(k) or 403(b) in 2017.  Also, employees who are age 50 or older during 2017, will be able to make an additional “catch-up” contribution of $6,000 into their 401(k) or 403(b) plan.

For a great handout for employees addressing retirement uncertainty, click here.

By Maria Peterson, HR Manager, SPHR, SHRM-SCP