HR Management & Compliance

Are Your Supervisors Trained to Explain 401(k)s?

These days many people live well into their eighties, and some make it into their nineties. That means that many of your employees can expect to live 20 or more years in retirement.

Financial experts say that to live comfortably during retirement, a person needs about     80 percent of his or her current wages. Social Security alone won’t provide the level of income necessary for employees to continue living comfortably in retirement. And for most workers, personal savings won’t make up the difference.

That’s why 401(k) plans are so important. These plans are the key element in retirement planning for most employees.

Because 401(k)s are such an important benefit, employees are likely to have many questions about how the plan works and how they can make their money grow. Your supervisors should be able to field basic questions about your 401(k) plan and help employees learn what they need to know to make informed investment choices and comply with the rules of the plan.

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Although some of your supervisory staff may already understand the ins and outs of your plan, it’s best to be certain and train all supervisors to make sure they have the information they need to provide employees with accurate and up-to-date information about your 401(k) plan.

Legal Overview

Section 401(k) was added to the Internal Revenue Code in 1978. This section of the federal income tax code allows employers to sponsor special savings and investment plans for their employees. These plans are called 401(k)s, after the section in the tax code. They are designed as self-funded retirement plans for employees.

Basic rules for 401(k)s are laid out by the Internal Revenue Service (IRS). Other rules are established by employers. The main advantages of 401(k)s for employees are that contributions are made with pretax dollars and that taxes on earnings are deferred until funds are distributed, which generally occurs after an employee reaches age 59½.

The Economic Growth and Tax Relief Reconciliation Act of 2001 allows 401(k) catch-up contributions for employees ages 50 and over. The maximum amount of catch-up contributions changes from time to time, depending on cost-of-living increases. To take advantage of catch-up contributions, eligible employees must make a separate written election for the additional payroll deduction. However, under the act, employers are not required to allow catch-up contributions or to match these extra employee contributions.

Training Topics

Your 401(k) training program should contain, at a minimum, the following general elements:

  • Definition of 401(k) plan
  • Advantages of 401(k)s
  • Eligibility requirements
  • Maximum contributions
  • Vesting rules
  • Savings potential
  • Catch-up contributions
  • How contributions are handled by the plan
  • Invested options
  • How to choose investments
  • Diversification guidelines
  • 401(k)s vs. IRAs
  • Distribution rules
  • Loans and early withdrawals
  • Disadvantages of 401(k)s

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Training Specifics

Here is a basic outline of topics specific to your organization’s plan that you need to cover during training:

  • Review your organization’s matching contributions, including the percentage of the matching contribution. Give an example of how much this can add to an employee’s account annually.
  • Discuss eligibility requirements for your 401(k), including how long employees must be employed to be eligible (usually 1 year) and whether part-timers are eligible.
  • Describe the plan’s vesting rules for employer contributions and specify the maximum percent of annual wages that employees are allowed to contribute to the plan.
  • Help trainees calculate the amount of savings they should have when they retire, based on their annual salaries, annual contributions, average annual return on investment, and employer matching contributions.
  • Explain your policy on catch-up contributions, including the current amount of the catch-up contribution.
  • Discuss a sample 401(k) account statement with trainees. Identify all the information contained in the statement. Explain when statements are distributed to employees.
  • Review the investment options available in your 401(k).
  • Explain rules for transferring funds from one investment to another. Also provide copies of the slide to trainees so that they can show the chart to their employees.
  • Identify qualifying reasons for loans under your plan as well as maximums and minimums.
  • Discuss loan repayments, including the interest rate and the number of years employees have to repay loans.
  • Explain your plan’s rules for hardship withdrawals, including qualifying reasons, required proof of financial need, and so on.

The material in today’s Advisor is adapted from a course in TrainingToday’s HR Library called “How to Explain the 401(k) to Your Employees.”

In tomorrow’s Advisor, we’ll give you a 401(k) training exercise, and we’ll examine a comprehensive online library of interactive courses on dozens of key HR topics available now.

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