Retirement plan tips for business owners and employees
As legislative changes reshape retirement planning options, both business owners and employees will need to navigate an evolving landscape.
The Secure Act and other recent legislative changes, such as Secure 2.0 and The Cares Act prompted by COVID-19, have significantly impacted retirement plans. The overarching goal of these initiatives is to improve and expand retirement savings opportunities while also making it easier for employers to offer plans.
It’s essential for employers to understand how these changes will impact their offerings, so they can provide plans that both attract and retain talent in today’s competitive market. Additionally, employees should be aware of what’s changed so they can take advantage of new opportunities and maximize their retirement savings.
“Successfully saving for retirement is more closely linked with behavior than knowledge”
Eligibility
Traditionally, companies have tightly controlled access to 401(k) plans, often excluding part-time employees and imposing strict vesting requirements. Key provisions of the Secure Act, both 1.0 and 2.0, include allowing part-time employees to participate in plans if they meet specific criteria, like being at least 21 and working between 500 and 999 hours across two consecutive years. Companies do not, however, need to provide a match or profit sharing for these employees.
Vesting
Vesting schedules are undergoing a shift toward shorter durations. Previously, a seven-year vesting schedule was common, but regulatory changes limited it to six years. Now, many companies are opting for immediate vesting or “cliff” vesting. Traditionally, vesting followed a graded pattern, with incremental percentages earned over years of service. However, cliff vesting accelerates this process, where employees receive no benefits for the first two years and become fully vested after the third year.
Companies are leveraging this shift to attract talent, especially as competitors adopt 100% vested models. Despite potential costs, offering earlier vesting can be a strategic investment in attracting and retaining valuable employees.
Distribution Flexibility
Investors now have new ways to gain early access to 401(k) funds. For example, under Secure Act 2.0, employers can give investors permission to take an annual distribution of up to $1,000 for an emergency, as long as the debt is repaid before taking a consecutive distribution.
We tend to discourage people from taking early distributions from their 401(k) plans. While there are circumstances where it could be the only option, most situations we encounter result in individuals not being better off.
We believe in educating employees about the long-term benefits of preserving their retirement savings. Providing projections and comparisons can illustrate the impact of early distributions, encouraging employees to prioritize long-term financial security.
Some companies we work with have implemented alternative financial assistance programs for employees facing emergencies. These initiatives, such as connecting employees with financial services representatives or offering other support, are often more suitable for short-term financial needs than tapping into 401(k) funds.
Options for Highly Compensated Employees
We always emphasize to business owners that their retirement plans are inherently structured to benefit the average employee, aiming to level the playing field with highly compensated employees and owners. However, upcoming changes may pose challenges for business owners, particularly regarding catch-up contributions for highly compensated employees over 50.
Considerations for Employees
Eligibility
Investors need to know, first of all, that if they’re not eligible for their plan, they do have other options for saving. They should be focused on saving, regardless of whether they’re eligible or not.
Contributions
Once they are eligible, investors should be focused on either starting at or working their way up to the minimum percentage contribution to receive the company match.
Tax Implications
Successfully saving for retirement is more closely linked with behavior than knowledge. That is great news for employees who feel insecure about their lack of expertise. We regularly engage with employees to address this. Despite being well-versed in financial concepts, it’s easy to succumb to emotional reactions, especially during market downturns. Much of our focus extends beyond understanding plan mechanics and maximizing contributions; it involves guiding individuals to make sound financial decisions that align with their long-term goals.
For example, we encourage investors to consider their tax situation when deciding between pre-tax and Roth contributions. Many plans offer a Roth option, allowing for tax-free growth over time. We help investors self-identify their tax status, educating them on the benefits of Roth contributions for those receiving annual tax refunds, and on pre-tax contributions for high-earning households nearing retirement, as an example.
While we suggest you consult with your tax preparers, many rely on self-preparation tools, so we try to provide guidance on tax implications to help you make informed decisions tailored to your financial circumstances.
Planning
When it comes to investments, our goal is to simplify the process for our clients. We have the experience and expertise to build reliable investment strategies that deliver = strong results. Retirement accounts are intended to produce returns long-term and aren’t conducive to day trading. The best time to make investment decisions is when there’s a change in life circumstances or risk tolerance, not in response to daily market fluctuations. It’s important for us to get to know your money personality and retirement goals, so we can build and manage a plan to make them a reality.
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