Getting the most out of your 401k plan

“Hi, my name is James. I am a successful businessman, with a construction business. Recently, I was at a party where I heard someone talk about 401(k) plans. I confess, I have never thought much about them before, but I just can’t seem to forget the conversation. I have always treated my employees well. Do I really need to give them a 401(k) option?”

Hi, James. We are pleased to learn that you are taking care of your employees well. But you never know what an employee is thinking or worse, when he is considering leaving. It is also true that the depressed economic condition has given people an incentive to save. They don’t know how the economy will turn out and they want something to sustain themselves on in lean times. In such cases, offering them an investment vehicle such as 401(k) might help you retain good employees. Employees get other benefits too from signing up for a 401(k) plan. One, they get tax benefits and second, employers generally contribute, which further increases the employees’ investment corpus.

Contributing to a 401(k) plan is a simple and effective way of saving money for retirement. Employers who offer these plans become preferred employers. For instance, if an employee has to choose between an employer who is offering a 401(k) plan and another who is not, they are likely to go with the former, even if the latter is offering a little more salary.

The result, you will attract the best employees in the market. It is also a way to ensure that good employees stay with you and don’t leave for better paying or bigger competitors. Another benefit of offering a 401(k) plan is that the employee’s contribution will come out of his pre-tax salary. This means, when it is time to calculate tax liability, the employee’s taxable income is reduced by the amount he/she contributes to the 401(k) plan. This not only helps him/her to save more money but also reduces his/her tax outflow. Sounds good, doesn’t it?

Employers can also benefits from offering 401(k) plans. For example, with a 401(k) plan, you don’t have to decide where you will invest the money and second, you are not obliged to specify how much money the employee is going to get from you in case he/she leaves or retires.

We have one piece of advice for you here. Rather than signing up with an insurance or bank-based 401(k) provider, think about setting up a 401(k) account with a independent provider that offers unbundled plans. One company I suggest is 401k Easy (www.401keasy.com) because we are told their fees are low, and they offer all the same top quality no-load mutual funds’ investments (Vanguards, Fidelity Funds) and self-directed accounts (Schwab and TD Ameritrade) you can get from much more expensive 401(k) providers. Please let me know how it goes, and what you decide to do.