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How to Explain the 401(k) To Your Employees

( ). How to Explain the 401(k) To Your Employees. Session Objectives. Identify benefits of participating in a 401(k) Understand investment options Explain the plan’s rules Answer questions Help employees make informed choices. Prequiz: Test Your Knowledge. a. Flexible savings plan .

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How to Explain the 401(k) To Your Employees

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  1. () How to Explain the 401(k)To Your Employees

  2. Session Objectives Identify benefits of participating in a 401(k) Understand investment options Explain the plan’s rules Answer questions Help employees make informed choices

  3. Prequiz:Test Your Knowledge a. Flexible savings plan • A 401(k) is a: b. Retirement plan • Employer contributions belong 100% to employees only after they are: a. Vested b. Taxed a. 65 • Earliest penalty-free distribution age is: b. 591/2 a. Allowed • Borrowing from a 401(k) is: b. Not allowed

  4. What’s a 401(k)? 401(k)—n. a special employee savings and investment plan that offers pretax contributions and tax-deferred earnings; an employee-funded retirement plan

  5. What are the Advantages of a 401(k)? Automatic payroll deductions • Tax-deferred earnings Reduction in current gross income Control of account

  6. More Advantages • Portability • No minimum investments • Loan options • Matching funds

  7. Who Is Eligible to Participate? Eligibility = Employee + 21 yrs old + time-in-employment requirements

  8. How Much Can Employees Invest? • Maximum contributions • Vesting rules

  9. When Should Employees Start Investing? Example 1:Tom is 45 years old when he starts contributing: Annual salary $20,000 Annual contribution 6% Average annual return 7% Years of work before retirement 20 Employer contribution 0 Retirement savings $52,397

  10. When Should Employees Start Investing? (cont.) Example 2: Karen is 25 years old when she starts contributing: Annual salary $20,000 Annual contribution 6% Average annual return 7% Years of work before retirement 40 Employer contribution 0 Retirement savings $264,012

  11. Can Employees “Catch Up” If They Start Late? • Age 50 or older • Separate written election • Employer obligations

  12. How Are 401(k) Contributions Handled? Employee contributions Trust fund Investments Employee shares Employee accounts

  13. What Are the Investment Options? • Money market funds • Stable value funds • Employer stock • Mutual Funds • Bond funds

  14. What Are the Investment Options?(cont.) • Growth and incomefunds • International and global equity funds • Aggressive growthfunds • Stock index funds • Balanced funds • Growth funds

  15. Want the highest possible long-term return and I’m not afraid of taking risks • (Aggressive) • Can live with some ups and downs because I have some time for my money to grow • (Moderate) • Don’t want to risk principal and want a guaranteed return on investment • (Conservative) What Type of InvestorAreYou?

  16. 401(k) Basics • Do you understand: • What a 401(k) is? • Advantages? • Eligibility? • Contribution rules? • How contributions are invested? • Investment options?

  17. How Can Workers Choose The Best Investments? “Before you invest, investigate.” —William Arthur Ward

  18. What’s the Ideal Mix of Investments? Growth Conservative Age Stock Stock Bonds GIC 25 to 34 25% 60% 5% 10% 35 to 44 20% 60% 10% 10% 45 to 54 15% 60% 15% 10% 55 to 64 15% 45% 30% 10% 25 to 3425% 60% 5% 10% 35 to 4420% 60% 10% 10% 45 to 5415% 60% 15% 10% 55 to 6415% 45% 30% 10%

  19. How Do 401(k)s Compare with IRAs? 401(k) IRA LIMITS Yes, but much higher than IRA Yes, about 1/3 of 401(k) Payroll deduction Must make deposits DEPOSITS EMPLOYER CONTRIBUTIONS Yes, matching None TAX SAVINGS Immediate After tax return filed TAX TREATMENTON DISTRIBUTION Income averaging on lump sums; IRA rollover possible None

  20. What About Workers Who Leave Before Retiring? • If an employee leaves • All own contributions • Vested $$ • Rollover rights • If an employee dies • All $$ vest • $$ to named beneficiary

  21. What About LoansFrom the 401(k)? • Qualifications • Minimums and maximums • Repayment • Separation

  22. When Are Funds Normally Distributed? • Employee leaves organization • Employee totally and permanently disabled • Employee dies • Plan is terminated

  23. Taxes • Penalty What If Employees Withdraw Money Early

  24. What Are “Hardship” Withdrawals? • Immediate and necessary need • No other resources • Only from employee contributions • No contributions for 6 months • Taxes must be paid

  25. Are There Any Disadvantages to 401(k)s? No insurance Vested values Employer can amend at any time Unwise investing Market downturns Spending before retirement

  26. Review: Which Are 401(k) Features? Loans Insured investments Diversification Employee contributions subject to vesting No taxes on withdrawals Matching contributions

  27. 401(k) Features • Do you understand: • Portfolio diversification? • 401(k)s vs. IRAs? • Normal distributions? • Loans and other early withdrawals? • Disadvantages?

  28. Key Points to Remember 401(k)s can be an excellent way to save for retirement Employees are responsible for investments They should be informed about the plan and investments Wise investors diversify

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