The 401(k) retirement plan is an important part of Company X’s employee benefit package. Although the 401(k) is explained during the New Employee Orientation, the explanation has historically been lacking. The results are low participation, confusion, and phone calls to the Human Resources office asking for clarification. The goal is to reexamine the 401(k) explanation presented during the New Employee Orientation and retool it so that it is easily understood and emphasizes the advantage of the plan.
The key to easily understanding 401(k) retirement plans is a clear explanation of the advantages and disadvantages of the plan. The assumption made by those participating in a 401(k) is that in the future, they will be living in a lower tax bracket. One advantage of a 401(k) plan is that it allows employees to contribute to a retirement savings plan without paying taxes on the money contributed until a future date. Therefore, the employee pays less taxes while contributing to the plan since they have less taxable income. The second advantage, in addition to tax-deferred savings, is that Company X contributes an additional amount into the employee’s 401(k). This is additional income that the employee will have available for retirement (Dessler, 2008). So, the advantages of a 401(k) plan are lower taxes today and the additional benefit of employer matching.
The main disadvantage of a 401(k) plan is that it is not a savings account. Unlike a bank account that an employee can withdraw funds from whenever they like, a 401(k) plan carries heavy penalties for anyone withdrawing from too early. The federal government designed the 401(k) as a retirement and penalizes individuals in the hopes of discouraging them from using it as something else. According to the Internal Revenue Service (2008), any deductions made from a 401(k) plan before the employee reaches age 59 1/2 will result in an additional 10% tax penalty. In other words, withdrawing early from a 401(k) plan will result in paying taxes to the government in amount of 35% or more of the deduction amount. If an employee is looking for a savings plan that allows them to access the money when they want it, they should consider having a portion of their paycheck automatically deposited into a savings account via the company’s direct deposit program.
The key to lowering confusion and reducing calls to Human Resources is creating a clear understanding of the 401(k) retirement plan at the New Employee Orientation. Ample time must be given to the subject. This is likely the only time retirement benefits will be discussed in a group setting. Allowing the group of new employees to ask questions freely will ensure the whole group as a better understanding of the plan. If the 401(k) presentation is rushed, the possibility is created that each new employee will be calling HR with the exact same questions. Additionally, it is important to make sure that everyone is clear on the tax implications of early withdrawal. Although there are exceptions to the tax penalty rule, those should be handled on a case by case basis. Finally, in addition to the presentation, a clear documentation of how the 401(k) plan works should be included in the employee manual. The manual should include a description of Company X’s matching policy since that effects how much employees will contribute, but it should be clear that the matching policy is subject to change should the fortunes of the company change.
Dessler, G. (2008). Human Resource Management. (11th ed.). Upper Saddle River, NJ: Pearson.
Internal Revenue Service. (2008). Pension and annuity income. Retrieved January 30, 2009.