As the burden of retirement savings
shifts from institutions to individuals,
and traditional defined pension plans take a backseat to 401(k) programs, employers must be equipped to offer retirement savings vehicles and educate their workers
about these investment opportunities.
But, offering a retirement plan isn’t enough.
You must also educate employees on how
the plan and long-term investing works.
“Employers need to educate employees in
how to invest this money, especially in
today’s economic environment with markets
that have everyone wanting to sell,” says
Richard Reiland, Private Financial Group,
market manager of retirement plan services
for Huntington Bank.
Smart Business spoke with Reiland about
how to administer a 401(k) plan and what
employees need to understand about them.
How is a safe harbor 401(k) different from a
traditional 401(k) plan?
With a traditional 401(k) plan, employees
are divided into groups based on compensation. If there is a significant disparity in the
amount that managers and owners invest in
the plan versus what entry-level employees
and other staff contribute, the highly compensated must withdraw some of their contribution and pay taxes on that amount for
the tax year. The comparison of highly compensated versus general employee contributions is called discrimination testing, and traditional 401(k) programs are subject to it. An
alternative is the safe harbor 401(k).
Employers provide fully vested contributions, meaning employees can leave the business and reinvest the money elsewhere.
Safe harbor plans are set up in two ways: as
a profit-sharing plan where the company contributes 3 percent to every employee unconditionally, or by matching, with the employer
matching the employees’ first 3 percent dollar for dollar, and providing a 50 percent
match on the next 2 percent not to exceed 6
percent. (The employer must match at least 4
percent.) The advantage to the safe harbor
401(k) is that all employees can invest up to
$15,500 (plus an additional $5,000 if they are
older than 50) without having to pay tax until
they withdraw the funds. The safe harbor
plan is exempt from discrimination testing.
Why do employers need to explain retirement plan benefits to participants?
Investing is a mystery to many employees,
whether they are highly compensated or not.
There is a great deal of apprehension associated with the stock market in today’s economic environment, and so employees must
fully understand the long-term investment
opportunities that the 401(k) presents and
not focus on the nightly news, which lately
has not painted a pretty picture of Wall Street.
Invite your plan administrator to speak during a meeting. Some providers make sure
their financial planners are available for oneon-one meetings to help employees understand the plan and choose appropriate
investments. Partner with a provider who
takes the time to educate employees and prioritizes customer services.
What misunderstandings should employers
debunk about 401(k) opportunities?
In short, participants who do not contribute
enough money to realize the full employer
match are walking away from free money. Be
sure to explain the matching equation to
employees and emphasize that there is no
other long-term investment like it. If an
employee were to walk into a bank, open a
savings account and deposit $100, the bank
will not match that with an additional $100
for a total of $200. But with a 401(k), employees essentially double their investment
money at no cost to them. With that, many
employees want to know if the company can
ever take away their investments if it should
go out of business or suffer severe financial
losses. The answer is no. An employee’s
401(k) account is not accessible by the company or the bank. Investments sit in the trust
department of a reputable retirement plan
provider and are safe from all creditors.
Finally, employees may ask why they
should bother investing in a 401(k) if their
bank offers CDs with interest, minus the risk
of a volatile stock market. In actuality, the
person who chooses a CD may lose buying
power over time. Money markets currently
pay 1 to 1.5 percent. But inflation is roughly 3
to 4 percent. Perhaps money ‘feels safe,’ but
the employee loses earning power as inflation surpasses interest on the money market
account. Despite the ebbs and flows of the
stock market, a well-diversified, long-term
investment, like a 401(k), will outperform
other savings vehicles like CDs.
How often should employers review their
401(k) plans?
You have a fiduciary responsibility to provide employees a good product and service.
Conduct periodic reviews of your plan to
ensure it is up to industry standards.
Scrutinize fees — they are often hidden. Who
is the trustee of the plan? Especially with brokerage and insurance company products,
you and your employees may be individual
trustees as opposed to a bank because the
broker or insurance company does not typically have trust power. Who bears the
responsibility for these investments? Are you
comfortable with what the plan offers, and
are your employees satisfied? Upon reviewing your plan, invite a representative from the
plan provider to speak at your company and
explain plan updates and changes so everyone is involved in the process.
RICHARD REILAND is the Private Financial Group, market manager of retirement plan services for Huntington Bank. Reach him at
(330) 438-1232 or [email protected].
