Life adds up. Long-term financial health has been reframed by economic uncertainty and a stock market dip that caused 401(k) participants to lose $1.4 trillion from late 2021 to mid-2022.
But businesses aren’t giving up on their employees’ financial future. A staggering 82% of employers told the Society for Human Resource Management they rank retirement planning as one of the most important benefits organizations can offer. In fact, 94% of companies offer 401(k) retirement plans and over half auto-enroll new hires into 401(k) plans.
Most HR professionals are already familiar with how 401(k) retirement plans help employees and businesses with recruitment and retention. A study from Accenture, a global business consulting firm, backs this up. It revealed 62% of employees say pensions and retirement benefits compel them to stay with an organization.
Plus, greater financial wellness is a multigenerational concern. In a report from Deloitte, 43% of millennials and 47% of Generation Z cited their financial future as a major stressor. HR professionals should 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 employees. Of course, you’ll need to be ready to answer their inquiries accurately, quickly and confidently. But don’t worry; this is our primer to help cultivate financial wellness through 401(k) plans.
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. Generally, employees who feel financially secure are less inclined to burnout and more likely to stay with a company.
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 pay without an immediate tax deduction. With a traditional 401(k) account, taxes aren’t taken until money is withdrawn.
401(k)s also let employees select their specific investments based on employer-provided options. Choices can include stock and bond mutual funds or target-date funds. Ideally, this lowers the risk of investment loss as participants near retirement.
How does a 401(k) benefit employees?
Beyond the advantage of deferred taxes, 401(k)s normalize retirement planning. Think of them as a passive form of financial readiness. After deciding to contribute, employees don’t need to keep up with the contribution on a monthly basis.
Instead, they have the luxury of adjusting their investment when they see fit. They might pivot when contribution limits change or a new investment opportunity presents itself.
Are there any 401(k) contribution limits?
401(k) contribution limits may change each year. For 2023, employees under 50 may contribute up to $22,500 annually. Employees over 50 have the option to make “catch-up contributions” — or an additional $7,500 — raising the total contribution limit to $30,000.
Keep employees in the loop about these changes. Contribution limits generally rise each year; consider providing 401(k) news during benefits enrollment or shortly after compensation reviews.
What are the 401(k) withdrawal rules?
Beyond the normal taxes associated with both 401(k) plans, any plan distribution before an employee turns 65 (or sooner with some plans) may result in an additional income tax of 10% of the withdrawal’s amount. A 401(k) withdrawal is considered early if it’s taken before a participant is 59 and a half, barring further exceptions.
It’s impossible to account for everything, but championing employees’ financial well-being may help offset the impact of disaster scenarios.
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.
Both methods have advantages depending on the economic climate, tax trends and personal factors. Providing employees with financial news and insight gives them the knowledge they need to make the best decision.
What is the average 401(k) balance by age?
It’s often the case that the longer someone invests in a 401(k), the higher its balance will be. And according to Vanguard, an investment management company, a few decades can make a significant difference:
| Average and Median 401(k) Balances by Age | ||
|---|---|---|
| Age | Average | Median |
| <25 | $6,264 | $1,786 |
| 25-34 | $37,211 | $14,068 |
| 35-44 | $97,020 | $36,117 |
| 45-54 | $179,200 | $61,530 |
| 55-64 | $256,244 | $89,716 |
| 65+ | $279,997 | $87,725 |
What is a 401(k) company match?
Some businesses invest in their workforce’s 401(k) accounts alongside employees. 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 favor a higher, matching contribution.
What happens to an employee’s 401(k) if they quit or change jobs?
Certain 401(k) balances are transferable. If the employee moves into an independent venture, an individual retirement account (IRA) could provide the option they 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.
What happens to an employee’s 401(k) when they die?
If a participant passes away, benefits they would have had are usually paid to a designated beneficiary. How these benefits are delivered, such as through an annuity or lump sum, is defined by the terms of the specific 401(k) plan.
401(k) vs. 403(b): What’s the difference?
While they’re not too different in theory, a 403(b) — or a “tax-sheltered annuity plan” — is offered by public schools and certain 501(c)(3) tax-exempt organizations.
401(k) vs. IRA: What’s the difference?
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.
2023’s limit for a traditional IRA is $6,500, or $7,500 for people over the age of 50. IRAs also have wider investment opportunities; even non-earning spouses can contribute to them.
How does HR support employees’ financial future?
None of us control the future. Instead, we anticipate and prepare for it. This is the essence of a solid financial wellness strategy. Helping employees be proactive is more effective — and sincere — than a guarantee.
Promoting programs for practical saving and retirement strategies gives employees a greater lease on their future. These can include money management classes, an on-site financial advisor or just helpful resources included in regular HR communication.
As employees approach retirement, they’ll start to form a picture of what it’ll look like. Without proper preparation, this period could spur stress. HR professionals can ease this transition by promoting responsible habits and incorporating financial wellness into company culture.
After all, supporting employees’ financial well-being and helping them prepare 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 single software 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.