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The 401(k) FAQ: What Employees Want to Know

Life adds up. For many, the compounded stress of the last two years has reframed long-term financial health.

According to Gallup, more Americans say they’re “very” or “moderately worried” about their money compared to a year ago. This stress carries over into work, hurting an employee’s engagement and well-being.

It doesn’t have to. Most HR professionals may already be familiar with the advantages a 401(k) retirement plan grants employees. Maybe so much so, it’s no longer seen as a competitive benefit, but just another box to check — like basic health or life insurance.

However, greater financial wellness is a multigenerational concern. In a report from Deloitte, 46% of millennials and 48% of Generation Z cited their financial future as a major stressor. As a result, HR professionals can reasonably expect a fresh wave of frequently asked questions surrounding 401(k) retirement plans and other financial matters.

Try not to look at this trend as an unreasonably tall order, but an opportunity to build trust with and support employees. Of course, you’ll need to be ready to answer accurately, quickly and confidently. But don’t worry; consider this a primer to help cultivate financial wellness among your workforce.

What is financial well-being?

The Consumer Financial Protection Bureau breaks down financial well-being into four pieces:

  • control over daily and monthly finances
  • freedom to enjoy life
  • capacity to absorb a financial shock
  • a clear path toward monetary goals

These factors cover financial security and choice now and in the future. Financial wellness is defined by more than an employee’s present comfort. In fact, it encapsulates one’s ability to reach their long-term goals.

How does HR support employees’ financial future?

None of us truly controls the future. Instead, we anticipate and prepare for it. This is the essence of a solid financial wellness strategy. Helping employees be proactive is far more effective — and sincere — than a guarantee.

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Promoting programs that shed light on practical saving strategies and retirement gives employees a greater lease on their financial future. These can range from money management classes or an on-site financial advisor or just helpful blog posts, tips or other resources included in HR’s regular communication.

As employees approach retirement, they’ll start to form a picture of what it’ll look like. Without proper preparation, this period could evoke anxiety or even dread.

HR professionals can ease this transition by promoting responsible habits and incorporating financial wellness into their organization’s culture. They could even spread awareness by shedding light on a benefit most businesses already offer …

What is a 401(k), and how does it work?

A 401(k) is a tax-deferred retirement savings plan offered by an employer. It’s a contribution plan that allows participants to set aside portions of their paycheck without an immediate tax deduction. With a traditional 401(k) account, taxes aren’t taken until money is withdrawn.

401(k)s also give employees the power to select their specific investment choices based on employer-provided options. Options often include stock and bond mutual funds or target-date funds. Ideally, this lowers the risk of investment loss as a participant nears retirement.

How does a 401(k) benefit employees?

Beyond the advantage of deferred taxes, 401(k)s normalize retirement planning. In some ways, they’re a passive form of financial readiness. After deciding to contribute, employees don’t necessarily need to keep up with the contribution on a monthly basis.

Instead, they have the luxury of adjusting their investment when they see fit, such as when contribution limits change or a new opportunity presents itself.

What’s the difference between a traditional 401(k) and a Roth 401(k)?

The primary difference between a traditional and Roth 401(k) is when taxes are applied. A Roth 401(k) takes contributions after an employee’s income is taxed, so there are no further deductions when money is withdrawn.

Depending on the economic climate, tax trends and personal factors, there’s an advantage to both methods. Providing employees with financial news and insight equips them with the knowledge they need to make the best decision for them.

What are the tax implications of a 401(k)?

Beyond the normal taxes associated with both 401(k) plans, employees may be susceptible to an additional tax — commonly set at 10% — if they withdraw funds before they turn 60. While early withdrawal isn’t ideal, some users may find it necessary in an emergency.

It’s impossible to account for everything, but championing financial well-being may help offset the impact of disaster scenarios.

What is a 401(k) company match?

Some businesses invest in their workforce’s 401(k) accounts alongside employee contributions. The amount contributed is left up to the employer, but most opt for either a dollar-for-dollar match (up to a certain percentage) or a partial deposit. "" Both options are attractive to employees. Needless to say, most will find a higher, matching contribution more favorable.

Are there any 401(k) contribution limits?

401(k) contribution limits may change each year. For 2022, employees under the age of 50 may contribute up to $20,500 annually. Employees over 50 have the option to make “catch-up contributions” — or an additional $6,500 — raising the total contribution limit to $27,000.

Keep employees in the loop of these changes. Contribution limits generally rise each year; consider providing 401(k) news during benefits enrollment or shortly after compensation reviews.

What happens to my 401(k) if I change companies?

While cashing out a 401(k) is an option, the tax consequences may make it hard to justify for anyone under the age of 55. Most 401(k) balances are transferable, but the exact nature of one business’s plan may not be as accommodating as a previous employer, especially if they don’t offer a matching contribution.

Additionally, there’s no requirement to remove funds from a 401(k) account at all. Employees should carefully weigh each option before deciding.

What happens to my 401(k) if I quit my job?

There’s no obligation to cash out a 401(k) if you’re no longer employed (though you may have some incentive). If you’re moving into an independent venture, an individual retirement account (IRA) could provide the option you need to continue safely saving for the future. However, it’s a good idea to consider how IRAs differ from 401(k)s before investing.

How is a 401(k) different from an IRA?

401(k)s are designed for employees. IRAs, on the other hand, are available to anyone — such as independent contractors and small business owners. Though both offer similar tax advantages, IRAs have a lower contribution limit.

2022’s limit for a traditional IRA is $6,000, or $7,000 for people over the age of 50. IRAs also have wider investment opportunities; even non-earning spouses can contribute to them.

Supporting employees’ financial well-being and preparing them for retirement shows an organization cares about their future, not just its own. Remind employees to consult a licensed financial professional for in-depth investment advice.

Learn how Paycom’s 401(k) Reporting tool eases and automates retirement plan management for employers. And explore Paycom’s easy-to-use app to see how it empowers employees at every stage of their careers.

DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.