There is a lot of conversation lately reminding employees and participants of the fundamental reasons to contribute to their own retirement through their 401 (k) plan, as well as why they should stay invested even during tough economic times.
Times are tough for employers, too. With that in mind, here is our reminder for you about the importance of providing a 401 (k) plan. Although the ride has been bumpy, these basics have not changed.
- Competition for talent. Employees expect to have a 401 (k) plan. When the economy is in overdrive, that’s especially true; but even when it isn’t, the 401 (k) plan has become a foundational employee benefit. If you don’t offer one, you may miss out on the talent you need to push ahead.
- Keeping the company fresh. Because they help employees accumulate retirement savings, 401 (k) plans may allow employees to retire on time. In turn, younger employees can continually move up the ranks, bringing fresh eyes and ideas to your business.
- It’s pretty easy. When you seek the assistance of the right retirement advisor, implementing and operating the plan doesn’t need to be disruptive to your business. Yes, there are lots of rules to follow. But more than three decades have elapsed since these plans were developed, and the industry has a good grasp on how to operate them simply and effectively.
YEAR END POPULAR QUESTIONS
Q: Our small company has, of course, suffered due to the Coronavirus. A few employees who had to take pay cuts are considering applying early for their Social Security benefits, rather than continuing to work at reduced pay. Where can we point them for information about this decision?
A: SSA.gov has the most up-to-date, accurate and complete information available about Social Security. There, people can obtain a statement of how much to expect when they begin receiving payments. Whether or not to begin payments is an important decision with lifetime implications, and it is important for those employees to understand that. Taking benefits early will mean a lifelong reduction in monthly payments. Yet, when the economy takes a downturn, the first inclination of people who are eligible may be to start their benefits early; according to the Center for Retirement Research, about 42% of people who were 62 in 2009—one year after the stock market drop in 2008—signed up for their benefits. That was a nearly 5% increase over the prior year. An April 9, 2020, post on the Squared Away Blog from the Center for Retirement Research at Boston College reminds readers of the considerable financial cost of starting Social Security benefits early: https://squaredawavbloq.bc.edu/feature/social-securitv-tapped-more-in- downturn/.
Q: Participants seem to need help figuring out the best approach to take with their 401 (k) plan investments. How can we help them?
A: Many employers share your concerns because financial decisions today will undoubtedly have considerable impact on future retirements. Your desire to help is commendable. But it’s important that you know the difference between providing financial education and financial advice, and that your service provider does, too. Generally speaking, you or your service providers can provide investment education without fear of triggering a prohibited transaction—an event with serious plan qualification implications. Such education is general in nature. For example, you can explain asset allocation, diversification, and dollar-cost averaging. Investment advice is more specific to an individual. Avoid telling a participant what they “should” invest in, even if it’s something you personally do. For more information about this important topic, read the article, The Difference Between Investment Education and Advice, from Financial Finesse and published on401khelpcenter.com: http://www.401 khelpcenter.com/ff/ff ed&advice.html#.XpizYS3MyHs.
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