Get into employees' headspace to boost participation in 401(k) plans

A 401(k) can sound like a term that lives behind a locked door. Behind that door are fees, portfolios, expense ratios, and a series of complicated acronyms, making it intimidating to even look for the keys to unlock it. But why is it that something so important can feel so inaccessible/?

First, it’s important to understand the playing field. There are two reasons this space can feel out of balance:

1. Many Americans don’t have access to retirement plans through their workplace. Of the +120M private-sector workers in America, approximately 39M cannot save for retirement through their workplace. This, in large part, hits small businesses hardest. That’s because many legacy 401(k) providers either don’t serve small businesses, or they charge prohibitively high fees. Since this gap hits small business and service roles, it means the impact is likely most felt by your local bartenders, the kitchen staff at your favorite restaurant, and the woman behind the counter at your bookshop.
2. Most Americans feel too overwhelmed to start learning where to begin. A report from Guideline shows that when asked about their feelings toward saving for retirement, most respondents did not feel informed or confident:
   • Only 26% indicated they understood their options and felt good about where they were.
   • 74% felt there’s important information they don’t know, too overwhelmed to start learning, or that they didn’t know where to begin.
   • Only 42% of respondents felt confident that they would be able to retire.
   • 37% have not started investing.

How to help employees feel more comfortable with their 401(k) 

It’s imperative to meet your employees where they’re at and understand their headspace when confronting their retirement planning options. Here are some of the common questions and concerns that employees have about 401(k) plans, along with suggestions on how to reply:

Q. How much should I be contributing to my 401(k)/? 

A. There’s no right or wrong answer, and the path could change based on your personal goals and circumstances. The most important thing to keep in mind is that it’s never too late or too early to learn more about saving for retirement.

If your employer offers a match, it can be a good idea to contribute at least enough to receive the match. If you don’t, it’s like leaving part of your compensation on the table.

Q. Should I contribute to my 401(k) even if there’s no employer match?

A. Even if there’s no match, it’s still a smart idea to participate in the plan because 401(k)s have a lot of tax advantages.

With a traditional 401(k), any contributions you make will be tax deductible, and any money earned in the account will be tax deferred over time, meaning you won’t have to pay taxes on it now. Instead, you will only have to pay taxes on that money when you withdraw it during retirement.

If your employer did contribute to your plan, you would still receive those same tax benefits. But if you anticipate being in a lower tax bracket when you retire, placing your money in a 401(k) now could potentially save you a significant amount of money yearly in taxes.

Q. Can I contribute to a 401(k) and an IRA at the same time?

A. Not only can you contribute to both a 401(k) and an IRA in the same year, but you can actually contribute to last year’s IRA—also known as a carryback contribution—until you file that year’s taxes, which can help you save more money for retirement.

Of note, each year, the IRS sets contribution limits for IRAs and 401(k)s. These limits may change annually, depending on cost of living adjustments. For 2023, the total contributions you can make across all of your traditional (pre-tax) IRAs and Roth IRAs can’t be more than $6,500. If you are over the age of 50, you are eligible to make an additional $1,000 catch-up contribution (or a total of $7,500 for the year). The IRS also sets income limits for contributing to a Roth IRA or and if you participate in an employer sponsored plan there are income limits for taking a deduction for your traditional IRA contributions.

However, if your annual taxable income is less than the IRS limit, you can only contribute up to your taxable compensation amount. For example, if your eligible compensation is only $4,000, your IRA contribution is limited to $4,000, regardless of the IRS limit.

Q. What is the difference between Roth and traditional 401(k) retirement accounts?

A. Contributions for both traditional and Roth 401(k) accounts are tax-deferred, meaning you won’t pay taxes on your earnings each year like you would with a general investment account. And while both have tax benefits, that’s where they differ:

• A traditional 401(k) gives you a tax benefit today by lowering the income taxed during the year contributions are made.
• A Roth 401(k) gives you a tax benefit in retirement, since contributions are made with after-tax income. Additionally, the earnings on your Roth 401(k) may be taken totally tax-free if certain requirements are met.

Q. Can I get access to my funds in an emergency?  

A. While you typically can’t access money from your 401(k) until you reach age 59 ½ or leave service with the employer sponsoring the plan, you may qualify for a 401(k) loan or a hardship withdrawal if you meet certain eligibility requirements. Before drawing from your retirement savings, however, it is strongly encouraged that you investigate all other options, as you may permanently impact your retirement readiness.

Top questions employers have about offering retirement benefits

As an employer, what do you need to know in order to best support your employees and best cover all your bases/? Here are the most commonly asked questions about offering retirement benefits:

Q. Am I required to offer a retirement benefit?

A. Potentially, yes. Whether you’re required to provide a retirement program, like a 401(k), depends on your business location, due to recent state-mandated retirement programs. The rules of these programs vary greatly from state to state, but they could help bridge the retirement gap for the millions of U.S. workers who currently don’t have access to an employer-sponsored plan.

Q. When is the best time to start a new 401(k)/?

A. There’s no wrong time to offer a retirement benefit to your employees. However, there are a few advantages to starting a 401(k) earlier in the calendar year, including maximized savings for employees, more predictable nondiscrimination testing, and an improved employee experience.

Q. Should I offer profit sharing?

A. Profit sharing can be a win-win for both employers and employees, helping employees save more for retirement typically without adding to their yearly taxes. There are many advantages to profit sharing, including:

• It’s a bonus with tax benefits: Pre-tax profit sharing contributions are tax-deductible to the employer and aren’t subject to Social Security or Medicare withholding. As a year-end bonus, a profit sharing contribution may be worth more to employees than a similarly-sized direct bonus payment.
• A flexible benefit: Not sure if you can offer a potentially costly employee benefit? With profit sharing, contributions are tax-deductible for employers for the previous tax year. This delayed approach allows employers to assess their finances before deciding whether or how much they want to contribute to each eligible employee’s 401(k) account.
• All employees can reap the rewards: Profit sharing is a great way to contribute to highly compensated employees—owners and those earning $150,000 or more—without failing IRS compliance nondiscrimination testing.
• A benefit that can vest over time: Employers can choose a contribution vesting schedule based on an employee’s tenure. Employees who leave the company before their contributions are fully vested forfeit the unvested portion. Vesting can incentivize retention, as employees receive more contributions to their 401(k) the longer they stay.

Q. What’s the difference between a 401(k) and a pension plan?

A. Both 401(k) plans and pension plans are employer-sponsored retirement plans. A 401(k) is a defined-contribution plan, which means the employer contribution amount going into the plan is specified, but the future benefit isn’t set. With a 401(k), employees and employers can contribute, and employees can typically choose their own 401(k) investments.

A pension plan is a defined-benefit plan that provides a specified payment amount in retirement. But with pensions, employees don’t have control over the plans’ investment decisions.

Q. Do I get a tax credit for my 401(k)?

A. Potentially, yes. The recent retirement legislation SECURE 2.0 expanded the incentives for employers to offer retirement benefits through generous tax incentives—specifically the enhanced Retirement Plans Startup Costs Credit and the Small Employer Automatic Enrollment Credit.

Why improving employee confidence with their 401(k) matters  

Research shows that access to a 401(k) may reverse negative retirement sentiments and help build healthy long-term financial habits. A study from Guideline shows that those who started investing with a 401(k) are nearly twice as confident in their ability to retire compared to individuals who have not started investing. And those who began saving via a 401(k) are nearly three times as likely to feel comfortable investing for the long term compared to those who have not yet invested.

Jeff Rosenberger, COO of Guideline, has 15+ years in financial services and tech.