The Rise of the Robo-Advisers

Read Up on Retirement Plans

By Richard Y. Hu

 

As a human resources professional, you are often tasked with creating a financial retirement plan for employees of the company, both to attract and retain talent and to ensure that employees are cared for when they retire after a lifetime of work. Financial security in retirement can be accomplished in several manners, and here are some key points you should consider for your employer and employees when dealing with 401(k) plans.

 

401(k) retirement plans: The foremost tool in your repertoire for retirement planning is the traditional 401(k) plan, which is a salary-deferral plan. Under this plan, employees can request employers to withhold pretax dollars from their pay check (up to $18,000 annually for 2015) for depositing in an account, and the employer can also contribute to the account by matching a portion of the employee’s contribution. The employee is usually responsible for how money in the 401(k) account is invested. Employees, however, can only withdraw their own contributions before the age of 59½ subject to a penalty and withdraw the employer’s contributions after working at the company for a certain period of time.

 

Taxes, taxes, taxes: Taxationwise, an employee can decrease his or her taxable income by diverting part of the salary into this account and the money in the account can accrue interest, dividends or capital gains from investments that won’t be taxed until the money is withdrawn from the account. On the other hand, an employee can’t claim capital losses if the investments have lost value. The employer’s contributions are also deductible on the employer’s federal income tax return subject to certain limitations.

 

Roth 401(k) plans: Employers are now increasingly offering Roth 401(k) plans. The difference between a traditional 401(k) plan and a Roth 401(k) plan is that while the traditional 401(k) plan allows for contributions from pretax income, thereby reducing the taxable income that is reported to the IRS, the Roth 401(k) plan allows for contributions that are from post-tax income and, therefore, won’t reduce the taxable income that has to be reported. However, that means that when an employee withdraws money, the withdrawal is tax-free provided that the Roth 401(k) has been open at least five years and the employee has reached the age of 59½. Employers can only offer a Roth 401(k) plan if they already have a traditional 401(k) plan. Employers, however, can give employees the option of splitting their annual contributions between the two types of 401(k) plans, though the overall limit is $18,000 as of 2015.

 

The employer’s liability: An employer can administer the 401(k) plan itself or use a third party. If the employer administers the plan, the employer is responsible for establishing the factors for eligibility, what percentage of salaries can be contributed to the plan, whether to match employee contributions and to what degree, and what investment options are available within the plan. When determining the eligibility criteria, an employer can impose two restrictions: An employee must work for a full year (usually at least 1,000 hours over 12 months) and be at least 21 years of age before enrollment. All employees must have an equal opportunity to save for retirement.