What are the latest Trends in 401(k) plans with respect to small businesses and data security?

  1. I have been reading a lot about the retirement saving issues in the U.S. lately. And it seems that the 401(k) is the primary solution for tackling this problem. I run a small business in a rented office space in California. I wish to know whether I need to offer 401(k) plans to my employees. Also, what are the data security risks that need to be considered with regards to 401(k)? Brian, California

Hi Brian, yes it’s true that there is a renewed emphasis on the 401(k) plans and they are being viewed as the primary solution to the retirement savings in the United States.

With increased awareness of the crisis around retirement savings, several states in the country are now waking up to take powerful measures. The steps to make retirement simpler and largely automatic has led to an increased possibility of individuals participating in the 401(k) plans being offered by their employers.

You will find that numerous states have taken the initiative to create legislation which requires all businesses (except very small ventures) to offer as well as register their employees in a 401(k) plan. Some of the states that are actively working on this legislation include California, Illinois, New York, Oregon, Massachusetts, Virginia and Minnesota.

The aim of creating such legislation is to allow bankruptcy experts to withdraw the retirement plan assets of employees from the insolvent firm in a quick and efficient manner.

There has been a lot of publicity of the data breaches faced by the Republican and Democratic parties in the country. All this publicity has greatly raised the concern for data security, even for retirement plans such as 401(k). It is true that retirement savings plans are also subject to hacking risks and savvy companies are making consistent efforts to protect the critical information in their employees’ 401(k) accounts.

There was a recent article published by Jackson Lewis that highlighted existing legislation as well as the security measures that employers can take in the future in order to protect sensitive data.

Some of them include the following:

  • Implementing due diligence for all information and security measures while choosing and supervising vendors.
  • Offering training to personnel on various legal and fiduciary responsibilities.
  • Creating privacy contingencies for contracts developed with service providers.
  • Providing restricted access to all sensitive data to personnel.
  • Creating written rules, policies and processes that have details about the federal laws and applicable state for personnel.

You can consult 401keasy for a quick and easy setting-up of your 401(k) account.

Can I take money from my 401k account for starting a new business?

Q. My husband has been working with a corporate firm for almost 15 years. He now wants to quit his job and start his own personal business on a small-scale. This business will naturally require some initial and ongoing investment. He has a 401k plan, but can he withdraw money from it in order to start his new business? Jessica, Minneapolis

A. Hi Jessica, the answer to your question is- Yes. Once your husband quits his current job, he is free to utilize the funds in his 401k plan for all kinds of purposes, including starting a new business. However, there are always some risks involved in using the retirement funds (example, venture capital). The most significant risk is that in the event the business venture fails to take off, your husband may lose his business assets as well as his retirement savings.

There are basically three ways to use the 401k money to start a business:

  • Distribution of money
  • Taking a mortgage against the sum
  • Rolling over the 401k plan into a new business owners’ retirement savings account

The third option for starting a new business with the existing 401k plan is ROBS or Rollovers as Business Startups. With this plan, your husband can make use of the funds in the 401k account and start his own business without the need to pay taxes on the amount withdrawn. He would also avoid facing an initial withdrawal penalty.

The downside, however, is that this process could be quite complicated. If your husband takes this option, he would first need to incorporate his small business while opening a new 401(k) plan for it. This is followed by rolling over the funds in the current 401(k) plan into this newly opened account. The good news is that both the accounts are tax exempt. Therefore, your husband will avoid any tax hit.

The owner of the newly incorporated company, that is, your husband, has the freedom to decide where and how he spends the 401(k) funds. They could be used for meeting operational costs of the new business.

In the event that things don’t work out too well with the 401(k) financing, your husband would need to make payment for the losses; however, 401(k) offers before-tax money and this brings down the effectual cost. Also, there aren’t any credit implications.

Can I withdraw money from my 401(k) account?

Q: I have been employed by this corporate for nearly four years now. I’m 36 years old and trying to collect funds for my son’s private school tuition fee. The fee is quite high and it is rather difficult for me to manage it within my fixed monthly salary. Also, I am the independent earner in the family. Can I withdraw funds from my 401(k) plan? What are the long-term consequences of this action? Alice, Colorado

Ans: Alice, the answer to your question is-Yes. You can definitely withdraw a part of or all of your contributions from your 401(k) account. But each withdrawal is subject to taxes. Therefore, it isn’t as simple to withdraw earnings and collections from your 401(k) account and any potential penalties or taxes due will primarily depend on your age.

Finance experts suggest that even though you could borrow money from your 401 (k) account, you should do so with a lot of reservations. This is because besides your home, your employer-funded retirement plan likely constitutes the majority of your total wealth.

It is important to understand that once the savings in your 401(k) plan are withdrawn, it is very hard to replace them. 401(k) is a tax-advantaged account and therefore allows the accumulation of pretax contributions, with no taxes hindering that growth. The huge advantage of maintaining a 401(k) account is that new earnings get generated on the old ones and you can thus accumulate a greater amount of money as compared to a regular taxable account.

Although you might feel tempted to withdraw money from your 401(k) account, you will end up losing this rather lucrative savings opportunity. This is especially true for younger investors. If you withdraw money from your 401(k) account before the age of 55 years, you will likely face high penalties.

If financial hardship is making you consider a withdrawal from your 401(k) savings, then you could think about a 401(k) loan. However, avoid taxable withdrawals as much as possible.

Broadly speaking, there are only three scenarios in which you should consider pulling out money from your 401(k) account:

  • When the average account balance has reached a $92,500 high.
  • You are equipped to handle repayments.
  • If you quit employment, the loan might become due.

Most investment experts would advise against withdrawal from a 401(k) account and let the account ride for as long as possible. Also, do your research when looking for a credible provider. For instance, www.401keasy.com can help you easily set up an account, make contributions and also track all account activities within minutes.

I don’t have any debt. Do I still need a 401K plan?

Q: I have managed to pay off all my debt, even my massive student loans. I am completely debt free now. I know that 401K plans are great for retirement savings but do I really need them even though I have no debt and that means I don’t have any recurring drain on my finances? Why can’t I just save through regular methods like bank FDs or stock market investments or other things like these? Please advise- Joyce, New Jersey.

Ans: Joyce, it’s good that you have paid down all your debts and that you are debt free now. That’s a very important move if you want to have a financially secure future and an anxiety free retired life.

Now to move on to your question, yes, you DO need a 401k plan even if you have no debts to pay off. Yes, you can surely save through the regular methods, like you have mentioned, stocks, CDs, FDs, bonds etc. The big difference is that, with these, you have no tax advantages that can cut down your payment to Uncle Sam. Also, the risk factor that you take on with investments like say, stocks, is really high but with a 401K plan you have the advantage of diversifying your investment into many options that are chosen by YOU. You can easily clamp down on your risk with the 401K and that’s something that becomes a huge advantage as you near your retirement age.

Here is another very pertinent factor to consider too: Does your employer put in his own money in your investments in CDs or Bonds or FDs or stock? Absolutely not! But with 401Ks, your employer may make contributions that are equal to your own. That translates into free money for you to put away for your retired life. You don’t really want to say ‘NO’ to free money do you?

With so many benefits to offer, 401K plans are the smart choice for anyone who is financially savvy. Plus, go with a reliable provider like www.401keasy.com and setting up the account, making contributions and tracking it is all so easy that it just takes a few minutes of your time each month. Don’t ignore the fantastic saving opportunity that these plans present to you, Joyce. Go open your account right away and make sure you ask your employer about matching contributions too.

What happens to 401K if the employer goes bankrupt and the company shuts down?

Q: I have been working at this company for about five years now and I have a 401K plan through them. I have been hearing that the company has been making losses for quite some time now and that they are on the verge of bankruptcy. If they do shut down, do I lose my 401K savings? Should I withdraw all the funds right now, to play safe? Please advise- Stephen, Dallas.

Ans.: Stephen, there is no need to panic and there is absolutely no need to withdraw your money from the 401K plan. In fact, I recommend that you DO NOT do this because you stand to lose the range of benefits that come from investing in this plan which comes with a clear tax benefit.

The 401K account that employees like you have is not held by the company itself. The company’s management or accounts personnel have no access to your money in this account either. In case of a company facing a bankruptcy, there is no way for anyone, except, the account holder, that is, you, in this case, to utilise the money in the 401K or divert it in any way.

Now what happens if the company does shut down? Well, the 401K plans will most likely be terminated. That does not mean your money is gone. All you may have to do, if this happens, is to roll over the savings that you have accumulated in this account to another one. The smart move here is to roll the cash over into another retirement savings account that offers tax benefits. An IRA is a good option for you because it lets you avoid paying taxes on the sum and you can also avoid the premature withdrawal penalty by simply switching over to a traditional IRA. Also, you do want to continue saving for your future, right? The IRA gives you the perfect opportunity to continue doing so.

What you should be doing right now to safeguard your interests and avoid anxiety is keep track of your 401K. Get your HR department to give you information about the 401K account so that you can create a login and access it online at your leisure. Also do some groundwork about other retirement savings plans that you may be able to opt for, in case this one is closed down because of company closure. If your plan is held with providers like www.401keasy.com, this should not be a problem at all because the focus here is on user friendly interface, customer service and ease of use!

Getting the most out of your plan

Hello, my name is Steve and I am pretty confused about my 401(k) plan. I heard my new colleagues discussing about vesting. I do not know what it is. Since I am new to this office, and an introvert, I do not have the courage to ask what it means. I have another query too: can I borrow from my company 401(k) amount?

That’s an excellent question, Steve. Vesting is an important part of the 401(k) plan which most people are not aware of. It refers to ownership rights of the account balance of a 401(k) plan. It means any funds contributed by you, as per under Employee Retirement Income Security Act constituted in 1974-or ERISA as it is colloquially known- is completely owned by you with zero forfeiture risk. You should keep in mind, however that any contribution made by your employer on your behalf could be subjected to a certain vesting period. This refers to the minimum amount of time you must work for your present organization before you gain rights to company contributions to your account. Such vesting schedules could vary from one company to another. As an employee, you could be phased into complete ownership rights over a period of many years. When you are fully vested, it means you have earned complete rights over the money your company has contributed to your 401(k) plan.

To get a clearer picture, let us take an example. Your company may have already begun to contribute to your 401(k) plan just after you began to participate in the plan. In case the plan has a vesting requirement of a year, you will enjoy complete ownership rights only after you remain in employment with your company for a minimum of a year. Once you complete the period, you are completely vested in the contributions of the employer and you can go forward.

About whether you can borrow from your 401(k) plan, the short and sweet answer is yes, the plan permit loans. Do note that the maximum amount of money you can possibly borrow is less of the 50 percent of vested account balance. Alternatively, a maximum of $50,000. Do understand that every plan is unique and a few companies have particular conditions under which the loan can be availed. To give an example, your employer could state a minimum amount as a loan. It is also possible that the company could restrict the maximum number of loans outstanding at any given time.

Why don’t you visit https://www.401keasy.com/? It is the best place to gain knowledge about the 401(k). It is a treasure load of information about this important financial component in your life.

Understanding asset based charges

A friend of mine has started a 401k program for her employees recently and she says she is paying a number of fees pertaining to it. Among these, she mentions something called the asset based charges. What are these and is there any way I can avoid these charges when I set up my 401k account?- Gina Williams, Fort Lauderdale- starting up a pet care service and veterinary service.

Gina, many 401k plan providers do charge different types of fees when they set and manage your plan. Some of them are quite transparent and upfront about these and they let you know exactly what fees they charge and why. There are others who may be advertising no fee or low fees yet charging these and many other fees, and you end up paying them without even knowing that you are doing so. A good way to avoid hidden fees like these is to opt for a small business 401k plan provider like https://www.401keasy.com/, where the focus is on client needs and client satisfaction. Another advantage of going with https://www.401keasy.com/ is their easily customizable plans, their excellent support and comprehensive mutual funds offerings. Now, let’s give you a quick understanding of what these asset based charges are.

Asset based fees are charged against all of the assets you have in your 401k. They come out of the employee account balance. Usually, they are charged as a specific percentage  of the account balance, debited annually. For instance, your 401k provider may charge your 1% as asset based charges meaning that $1 out of every $100 in account balance goes to him in the form of this fee. Clearly, you can see that the provider is making money when your asset based charges are high.

So what are these fees typically used for? Well, you may think that any fee charged by your 401k provider goes toward money management. But with asset based charges, this is not all that this money is used for. They may also be paying for financial advisors, third party administrators record maintenance, investment management and more. A mutual fund that is charging asset based fees may keep a part of the money collected for its money management, forward a part to financial advisors, earmark another part for other parties to be paid through the record keeper and so on.

The best thing for you to do is check thoroughly to ensure that your 401k provider specifically guarantees ‘no asset based’ charge, if you are keen to avoid these costs.