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401(k) FAQ: What Employees Want to Know

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    Most in HR know a 401(k) is a tax-deferred retirement savings plan for employees. But with a wave of Gen Z and millennial workers concerned about their financial future, it’s important to prepare for any question they ask. Read in-depth answers to many of the most common questions around 401(k)s.

    Life adds up. Long-term financial health has been reframed by economic uncertainty and a stock market dip that caused 401(k) participants to lose $1.4 trillion from late 2021 to mid-2022.

    But, as HR professionals like you know, businesses aren’t giving up on their employees’ financial future. A staggering 82% of employers told the Society for Human Resource Management they rank retirement planning as one of the most important benefits organizations can offer. In fact, 94% of companies offer 401(k) retirement plans and over half auto-enroll new hires into 401(k) plans.

    Most HR professionals are already familiar with how 401(k) retirement plans help employees and businesses with recruitment and retention. A study from Accenture, a global business consulting firm, backs this up. It revealed 62% of employees said pensions and retirement benefits compel them to stay with an organization.

    Plus, greater financial wellness is a multigenerational concern. In a report from Deloitte, 43% of millennials and 47% of Generation Z cited their financial future as a major stressor. HR pros should expect a fresh wave of frequently asked questions surrounding 401(k) retirement plans and other financial matters.

    Try not to look at this trend as an unreasonably tall order, but an opportunity to build trust with employees. Of course, you’ll need to be ready to answer their inquiries accurately, quickly and confidently. But don’t worry; this is our primer — packed with employees’ common questions — to help cultivate financial wellness through 401(k) plans.

    What is a 401(k)?

    A 401(k) is a tax-deferred retirement savings plan offered by an employer. It’s a contribution plan that allows participants to set aside portions of their pay without an immediate tax deduction. With a traditional 401(k) account, taxes aren’t taken until money is withdrawn.

    How does a 401(k) work?

    401(k)s let employees select their specific investments based on employer-provided options. Choices can include stock and bond mutual funds or target-date funds. Ideally, this lowers the risk of investment loss as participants near retirement.

    How does a 401(k) benefit me?

    Beyond the advantage of deferred taxes, 401(k)s normalize retirement planning for employees. They can think of 401(k) as a passive form of financial readiness. After deciding to contribute, employees don’t need to keep up with the contribution on a monthly basis.

    Instead, they have the luxury of adjusting their investment when they see fit. They might pivot when contribution limits change or a new investment opportunity presents itself.

    When do I become eligible for a 401(k) plan?

    Employees who are over 21 and have worked for your company for over a year must be offered a qualified retirement plan. A traditional 401(k) may require two years of service to receive an employer contribution, if the plan specifies the participant is 100% vested in all plan account balances during their first two years.

    Regardless, the plan must let employees make elective deferral contributions after a year of service.

    What is the 401(k) contribution limit in 2024?

    For 2024, employees may contribute up to $23,000 annually — up from $22,500 in 2023.

    Keep employees in the loop about these changes. Contribution limits generally rise each year; consider providing 401(k) news during benefits enrollment or shortly after compensation reviews.

    What is the 401(k) catch-up change in 2024?

    Employees over 50 have the option to make “catch-up contributions” — or an additional $7,500 — raising their total contribution limit to $30,500.

    Do I have to report 401(k) contributions on my tax return?

    Employees contribute to 401(k)s on a pre-tax basis. Since employers already deduct 401(k) contributions from employees’ taxable income, workers generally don’t have to report the plans on their federal tax return.

    How does a 401(k) earn money?

    Employees can think of a 401(k) as a savings account with four ways to grow. In most cases, 401(k)s appreciate from:

    • employee contributions
    • employers’ matching contributions
    • the specific funds a 401(k) invests in
    • compounding interest the 401(k) earns

    Many of these factors rely on a set formula, making 401(k) growth a bit easier to predict. The performance of specific funds, however, can significantly alter the plan’s compounding growth.

    What are the 401(k) withdrawal rules?

    Beyond the normal taxes associated with both 401(k) plans, any plan distribution before an employee turns 65 (or sooner with some plans) may result in an additional income tax of 10% of the withdrawal’s amount. A 401(k) withdrawal is considered early if it’s taken before a participant is 59 and a half, barring further exceptions.

    It’s impossible to account for everything, but championing employees’ financial well-being may help offset the impact of disaster scenarios.

    What are required minimum distributions?

    When retired employees turn 72, they must start receiving required minimum distributions, also known as “RMDs.” On the other hand, active employees with 401(k)s or other workplace retirement plans may wait to receive payments until they formally retire. The only exception to this rule is if the active employee owns 5% of the business sponsoring the plan.

    What’s the difference between a traditional 401(k) and a Roth 401(k)?

    The primary difference between a traditional and Roth 401(k) is when taxes are applied. A Roth 401(k) takes contributions after an employee’s income is taxed, so there are no further deductions when money is withdrawn.

    Both methods have advantages depending on the economic climate, tax trends and personal factors. Providing employees with financial news and insight gives them the knowledge they need to make the best decision.

    What is the average 401(k) balance by age?

    It’s often the case that the longer someone invests in a 401(k), the higher its balance will be. According to Vanguard, an investment management company, a few decades can make a significant difference:

    Average and Median 401(k) Balances by Age
    Age Average Median
    <25 $6,264 $1,786
    25-34 $37,211 $14,068
    35-44 $97,020 $36,117
    45-54 $179,200 $61,530
    55-64 $256,244 $89,716
    65+ $279,997 $87,725

    What is a 401(k) company match?

    Some businesses invest in their workforce’s 401(k) accounts alongside employees. The amount contributed is left up to the employer, but most opt for either a dollar-for-dollar match (up to a certain percentage) or a partial deposit.

    Both options are attractive to employees. Needless to say, most will favor a higher, matching contribution.

    What happens to my 401(k) if I quit or change jobs?

    Certain 401(k) balances are transferable. If the employee moves into an independent venture, an individual retirement account (IRA) could provide the option they need to continue safely saving for the future. However, it’s a good idea to consider how IRAs differ from 401(k)s before investing.

    What happens to my 401(k) if I die?

    If a participant passes away, benefits they would have received usually are paid to a designated beneficiary. How these benefits are delivered, such as through an annuity or lump sum, is defined by the terms of the specific 401(k) plan.

    What’s the difference between a 401(k) and a 403(b)?

    While they’re not too different in theory, a 403(b) — or a “tax-sheltered annuity plan” — is offered by public schools and certain 501(c)(3) tax-exempt organizations.

    What’s the difference between a 401(k) and an IRA?

    401(k)s are designed for employees. IRAs, on the other hand, are available to anyone, such as independent contractors and small business owners. Although both offer similar tax advantages, IRAs have a lower contribution limit.

    2024’s limit for a traditional IRA is $7,000, or $8,000 for people over the age of 50. IRAs also have wider investment opportunities; even nonearning spouses can contribute to them.

    How does HR support my financial future?

    None of us controls the future. Instead, we anticipate and prepare for it. This is the essence of a solid financial wellness strategy. Helping employees be proactive is more effective — and sincere — than a guarantee.

    Promoting programs for practical saving and retirement strategies gives employees a greater lease on their future. These can include money management classes, an on-site financial adviser or just helpful resources included in regular HR communication.

    As employees approach retirement, they’ll start to form a picture of what it’ll look like. Without proper preparation, this period could spur stress. HR professionals like you can ease this transition by promoting responsible habits and incorporating financial wellness into company culture.

    After all, supporting employees’ financial well-being and helping them prepare for retirement shows an organization cares about their future, not just its own. Remind employees to consult a licensed financial professional for in-depth investment advice.

    Learn how Paycom’s 401(k) Reporting tool eases and automates retirement plan management for employers. And explore Paycom’s single software to see how it empowers employees at every stage of their careers.

    DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.