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.

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

Hi, I’m Richard and I run a small IT services company. I have a small group of employees working for me and recently, I decided to set-up 401(K) accounts for them. While inquiring about 401(K) plans for this purpose, I came across something known as a Safe Harbor 401(K) plan. What kind of plan is this? Could you please care to explain?”

Hi Richard,

It’s great to hear from you and like we always say, we’re simply here to help people like you. Now coming to your question, Richard, we would like you to know that this one of the more rare topics we come across. Wondering why it’s so rare? Well, it’s rare because the Safe Harbor 401(K) option is something that most people don’t opt for.

It’s an investment option that only complicates things, especially if you’re running your own business. So, instead of making you guess, we’ll just get down to helping your figuring out what goes on with a Safe Harbor 401(K). After you get a fair idea about the plan, you can go ahead and make a decision about whether this plan suits your needs or not.

The first thing about a Safe Harbor 401(K) is that the business owner is expected to make necessary contributions as matches. At first, these plans might seem great, but, if you have fewer than 25 employees or are okay with making the necessary employer contributions, you will have to dig deeper.

There are a few benefits to this type of 401(K) plan. You can make maximum contributions to your own account. However, you are also required to make matching “safe harbor” contributions to the accounts of your employees as a percentage of their compensations. What this means is that both, you and your employees, can increase tax-deferred contributions without being subject to the restrictions normally imposed on a traditional plan that does not need matching contributions.

The key contribution features are:

  • The maximum salary deferral contribution can be made by all participants.
  • The contributions can either be Roth deferral contributions, pretax, or both.
  • The overall contributions from employers and employees should not be above $ 52,000 or 100% of income per participant.
  • The employer must match employee contributions i.e. 100% of the initial 3% of salary and 50% of the remaining 2% of salary. Or else, they must offer a non-elective contribution i.e. 3% of salary for each eligible employee.

Here are a few things to consider:

  • Safe Harbor contributions and employee deferral are instantly vested.
  • The plan can be a complex one. You will need an administrator to oversee compliance, record keeping, testing, IRS Form 5500 filing, and maintenance.

These are some of the core features of a Safe Harbor 401(K). To access more detailed information, we suggest that you take a look at www.401keasy.com. 401K Easy has all the information you need about Safe Harbor plans.

Getting the most out of your plan

Hi, I’m Janice. As of this writing, I am in a financial soup. I need money urgently to make some payments and I was thinking whether I can do a hardship withdrawal from my 401k to get a cash infusion. However, I am not entirely sure of the ramifications. Can you please advise me on the same?

With the next presidential election approaching, it is difficult to tell what turn the economy is going to take. As the strained times continue, doing a hardship withdrawal from your 401k account is very tempting. Before you tap into the retirement savings, you need to understand the rules and have a clear idea of the consequences.

According to the IRS guidelines, a hardship withdrawal must only be made in the event of a heavy and immediate financial need. Moreover, the amount you withdraw must be absolutely necessary to fill the financial need. The employee’s need also includes the need of a dependant or a spouse. A withdrawal is regarded as heavy and immediate if you make it for any one of the following reasons:

  • To prevent foreclosure or eviction from your primary residence.
  • If you have expenses related to the purchasing of a primary residence, not including mortgage payments.
  • Education expenses (post-secondary) for the upcoming 12 months either for you, your spouse or your dependants.
  • Improvements or qualifying expenses for your primary residence.
  • Funeral expenses.

While the IRS rules make an allowance for the aforementioned withdrawals, it is not necessary that your plan allows them. Your plan provider can also limit the kind of hardship withdrawal that they allow. Withdrawing money from the retirement account sounds easy, but there are substantial drawbacks to it.

In a lot of the cases, such withdrawals are subject to taxes and 10 percent penalty, unless you meet certain criteria. In some of the cases, if an employee utilizes the hardship withdrawal, it restricts the investor from making any further plan contributions for six months or more.

Apart from the immediate costs of getting your hands on the funds from your retirement account, there are certain long-term consequences to the action that you will not realize for some time to come. The money that you remove from your account will no longer receive the benefits of compounding and growth over time. This is also applicable for contributions that are made to the plan in the restricted period following a withdrawal.

Desperate time call for desperate measures, but before you dip into your 401k to ease your financial bind, consider the immediate costs and the long-term impact on your retirement goals. If you want to get more in-depth information on your 401k, visit 401keasy.com. It is the most comprehensive 401k resource on the internet and you are sure to find answers to all the tricky questions you have.

Feature-rich 401k at Affordable Cost

I run a small carpentry workshop at home. I want a 401k plan that is pocket friendly but gives me more than a bare bones version. In particular, I want good security and sufficient investment options. Am I asking for the impossible?-Alfred J. Ryals, 3912 Pleasant Hill Road, West Palm Beach, FL 33401

Alfred, you are definitely not asking for the impossible! In fact, you are just trying to make sure that you have a perfectly adaptable 401k that safeguards your savings in the best possible way. What you should look for is a plan that offers you a good choice of no- load mutual funds so that you effectively diversify your investment. In addition, you should also be ensuring that the plan you choose is not pricey when compared to similar plans in the market.

Today, there are many such plans available for small business owners like you. At http://www.401keasy.com/, you will find that ‘ultra low cost’ means no surprises in the form of hidden fees, commissions and asset-based charges. Since 401k Easy also gives you an unlimited choice of  no- load mutual funds to pick your favorites from, this could be the best option for you. Its 401k is feature packed and you are sure to find right here all the functionalities that big company plans usually have, with the bonus that you can get them all within your budget. Don’t hesitate to compare prices with other plans before you make your choice.

Another aspect to check when you are doing your comparison shopping is whether all the 401k suites on your ‘list of possibles’ give you great security features. The 401k Easy plan comes with secure online administration. This makes the plan doubly attractive because you don’t want sensitive personal information about your retirement savings strategy leaking out into cyberspace or among your competitors.

While you are at it, do check out if a demo version is available so that you can actually get a hands- on feel for the 401k suite. You can check for yourself if it is easy to use, intuitive and clutter free. Remember that you will need to update information on a monthly basis. A complicated 401k package will need a lot of time and effort-investment month after month simply to plug in the latest figures. That can get really tedious after a while and the extra complications only increase the risk of human errors cropping up. Go for simplicity, security and a good range of investment options.