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 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.

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 401k plan

I am 24 and I will be starting my first job early next month. I want to invest wisely right from the beginning and want to know all about the 401k plan. Will I be eligible for applying to my company’s 401k plan? What should I ask my employer about it? – Karen Shawn

Hi Karen,

It is not often that I get questions about 401k from someone your age, simply because a lot of people do not think about retirement until they hit 40 or more, in spite of financial experts urging people to start planning retirement early. I must say that I am pleased to hear someone as young as 24 ask questions about the 401k, which is primarily an investment for retirement. Getting to your question about eligibility, the requirements for investing in the 401k plan are usually 1 or 2 years of service, and an appropriate age, which is 21 in this case.

As you mentioned you are 24, you meet the age criteria for the 401k. However, most employers need the employee to have at least 1 or 2 years of service to be eligible for the contribution plan. Some may have less restrictive eligibility criteria for their employees – the minimum age can be less than 21 and the number of years of service can be less than 1 year. So here is what you should ask your employer about the 401k.

  1. Will your employer match your contributions? This is the first thing you should ask your employer. The amount that your employer is willing to match can significantly increase your retirement savings. Usually, employers match your contribution, but the maximum they can contribute is limited to the plan they choose and the IRS policies.
  1. What will your investment options be? Your 401k will be invested into a variety of investment vehicles including stocks, mutual funds, GICs and bonds. You can continue with the plan offered by your employer or transfer some of the investment (partial rollover) to another plan if you do not like the investment options. We recommend that you visit 401keasy.com to learn about the different investment options you have.
  1. When will you become a vested employee? – The vested part of your 401k investment will be yours for good. Even if you leave your job, the amount that goes into your 401k will remain yours. Note that the contribution from your employer will vary based on their vesting requirements.

Can you withdraw your money, and when? If you need the money before retirement, due to an emergency or a problem, then you may be able to withdraw the money from your 401k investment. Find out under what situations you will be allowed to withdraw money from your 401k account and how much penalty you should pay, if any.

Nondiscrimination Testing with 401k Plans

I want to set up a 401k plan for my auto parts shop. Do I need to ensure that it complies with the nondiscrimination regulations year after year? Michael P. Ladd, Oklahoma City, OK 

A 401k plan is a retirement benefit plan that was created with the intent of allowing employees to save in an effective manner for their future. The many benefits and tax advantages offered with these plans are all established in line with this objective. This is also the reason why the government insists that these plans are offered to all employees irrespective of their position within your business or the total compensation they earn.

To get all the tax benefits that a 401k plan offers to participants, it should give benefits to all employees, including the rank and file staff. A plan that only benefits the business owner or top level management fails to pass theIRS’s non discrimination test. This test compares the plan’s participation as well as contributions made by rank and file employees with those of top level employees and the owner/ management.

Annual testing is mandatory for all regular/ traditional 401k plans to verify that they are non discriminatory. Through this testing it is verified whether the contributions made on behalf of rank and file employees is in proportion with that made for the top brass of your business.

If you want to avoid getting into the testing and verification loop then aSafeHarbor401k is the right 401k plan for your business.SafeHarborplans are exempt from the annual non discrimination testing that is required for the other 401k types. This plan has some inbuilt features that ensures that all employees are given equitable treatment when it comes to contributions.

Talk to an investment advisor to know more about Safe Harbor 401ks and the advantages they offer for your business. If you will be using a DIY 401k package like http://401keasyonline.com/, you can browse through their website or ask their support staff for help on setting up and managing aSafeHarbor plan.