Your employees deserve every chance to retire comfortably after spending several years or decades of their lives contributing to your success. In many cases, a 401k can be an effective tool to help them enjoy the time that they have after their careers are over. What are some ways to make sure that this tool is utilized to its maximum potential?
Employees Should Be Encouraged To Start Saving Early:
An employee who starts saving for retirement at age 25 only needs to save a few hundred dollars each month to achieve financially stability in retirement. If that same workers starts saving for retirement at age 35, he or she will need to save thousands every month to obtain financial security in retirement. In addition to encouraging employees to start saving early, it may be a good idea to talk up the concept of catch-up contributions for workers over the age of 50. Those who are 50 or older may contribute an additional $6,000 a year as of 2016, and that amount may increase to account for inflation in future years.
Matching Contributions Help Employees Quickly Increase Their Nest Eggs:
Employees are allowed to contribute up to $18,000 or 100 percent of their income for 2016. Employers are allowed to match either 20 or 25 percent of that amount depending on whether the company is a sole proprietorship or a corporation. Every dollar that an employer matches represents an automatic 100 percent return for the employee. It also leads to increased compounding opportunities going forward.
How Are The Accounts Configured?
It is a good idea to offer a variety of investment opportunities for your employees. Those who are older or want to be more conservative should be allowed to invest mostly in bonds as opposed to mostly in stocks. However, it is important to note that bond safety may hold employees back if they are looking for maximum returns. While it is never a good thing to see that a retirement account has lost value, stocks have averaged returns of about 7 percent per year on average. This is after taking major recessions and the Great Depression into account.
Can Employees Take Loans From Their 401k Accounts?
While the ability to take loans from a 401k can provide flexibility to those who need it, it could make it difficult to achieve a comfortable retirement. This is because there may be taxes and penalties levied if the loan isn’t repaid within five years. Furthermore, that money cannot grow and compound tax-free while it is outside of the account. Therefore, it may be in the best interest of the employees to not allow them to take loans from their 401k.
Employees Should Be Encouraged To Save Whenever Possible:
While a 401k can be a powerful tool to save for retirement, it should not be solely relied upon to help anyone make it after they stop working. Instead, it should be one part of an overall strategy that encourages diversification and long-term planning. Stocks and bonds will ideal be mixed with real estate and other holdings to allow individuals to retain a steady income long after they stop working.
With proper planning, it is certainly possible for employees to retire comfortably with the help of a 401k plan. While it may not offer the certainty of defined benefit plans offered in the past, investment plans should provide enough a return over a long enough time frame to allow your employees to eventually stop working. Those who need help with retirement planning should talk to a financial adviser or with the benefits department to find the resources that they need.