Employee Retirement Plans

By Bethany Ramos

According to the UC Berkeley Center for Labor Research and Education, the median balance among the 401K account holders in the US is less than $20,000. And only 50% of workers have been provided with a defined contribution plan from their employer, with only 30% of employees making regular contributions.

Why employees may not contribute to an employer 401K

Today, the richest 20% of Americans hold roughly 70% of IRA and 401K accounts. One of the most common reasons that employees neglect to contribute to an employer 401K is because of a simple lack of knowledge.

The average employee may not fully understand the benefits available to them in a 401K retirement account. Even more confusing is the fact that employer 401K plans are constantly changing, muddying the waters when it comes to when and how much an employee should contribute toward his or her nest egg.

What businesses need to know about employer 401K plans

Employer 401K plans provide several options for employees to invest for their retirement, including stocks, mutual funds, bonds, and treasury bills. Depending on the provider, they may only have a select group of funds to choose from or a wider database of investment options.

• Company fiduciary. In order to offer employer 401K plans, a fiduciary - usually your CFO or CEO - manages the plan in the best interest of the participants. The sole purpose of a fiduciary is to act on behalf of employees by making prudent decisions, following 401K terms, diversifying retirement investments to minimize risk, and making payouts. The fiduciary also ensures that employee deferrals are deposited on time.


• Matching contributions. To get tax deductions, employer 401K plans require you to make matching contributions to employee accounts. You can either contribute a flat monthly fee to each account, a percentage of an employee's salary, or the same amount your employee contributes. Both employer and employee contributions have annual limits on each employee account; government restrictions set limits at less than 100% of an employee’s compensation or $51,000 for 2013.


• Vesting. If you match, a vesting schedule determines when employees take ownership of your contributions. While employees own 100% of their personal contributions from day one, a traditional 401K plan will vest employer contributions over time; a safe harbor 401K plan will require that all employer contributions remain 100% vested upfront.


• Loans. Most plans allow employees to borrow money from their accounts to buy a house, pay for hefty medical bills, or cover various hardships. Employees receive a low interest rate - determined by the plan administrator - and five years to pay it back. Borrowers may be subject to an early withdrawal penalty of 10% under the age of 59.5 and must pay back the loan using post-tax dollars. If employees leave or lose their jobs, they have to pay back the balance of the loan within 60 days.

If your business provides an employer 401K plan to your staff, employees should be encouraged to contribute as soon as possible. The earlier that employees contribute to retirement, the more that money can grow through investments. Even if an employee can only contribute as little as 2%, it’s enough to make a difference in the long run.