31511230/0503 Business & Legal Reports, Inc. BLRs Human Resources Training Presentations Explaining...

31511230/0503 Business & Legal Reports, Inc.

BLR’s Human Resources Training Presentations

Explaining 401(k) to Employees2005 UPDATES


Goals

Be aware of the many benefits of participating in a 401(k) plan

Understand the investment options Know how the plan works, including

the rules for investing, transferring, and withdrawing funds

Be able to explain the 401(k) to your employees


What Is a 401(k) Plan?

Savings and investment plan Pre-tax income Tax-deferred earnings Designed primarily

as a retirement plan


What Are the Advantages Of a 401(k)?

Tax-deferred earnings Reduction in current gross income Automatic payroll deductions Control of account


What Are the Advantages Of a 401(k)? (cont.)

Portability No minimum investments Option to borrow from the account Matching funds


Who Is Eligible to Participate?

Employee Over age 21 Meets time-in-employment

requirement


How Much Can You Save?

Maximum contributions Vesting rules


When Should You Start Saving in a 401(k) Plan?

The earlier the better Example 1: 20 years in the plan Example 2: 40 years in the plan


Can You “Catch Up” If You Started Late?

Catch-up contributions Separate written electionEmployer obligations


Where Do Your 401(k) Contributions Go?

Trust fund for company employees Different types of investments Individual contributions buy shares Value of shares Investments not protected


What Are Your Investment Options?

Stable value funds Company stock Mutual funds Money market funds Bond funds


What Are Your Investment Options? (cont.)

Balanced funds Stock index funds Growth and income funds Growth funds Aggressive growth funds International and global equity funds


What Type of Investor Are You?

Conservative Moderate Aggressive


How Can You Choose the Best Investment?

Have I learned all I can about each investment?

How has this investment performed in the past?

How long do I have before I need the money?

How can I diversify investments to reduce risk?


How Do You Know What the Ideal Mix of Investments Should Be?

25 to 34 35 to 44 45 to 54 55 to 64

Age Growth Stock

Conservative Stock

Bonds GIC

25%

20%

15%

15%

60%

60%

60%

45%

5%

10%

15%

30%

10%

10%

10%

10%

25 to 34

35 to 44

45 to 54

55 to 64


What Are the Advantages Of a 401(k) Versus an IRA?

Maximum contribution Deposits Diversification Employer contributions Timing of tax savings Tax treatment at distribution


What If You Leave the Company Or Die Before Retirement Age?

If you leave the company If you die before

retirement age


Can You Borrow From a 401(k) Plan?

Loan qualificationsMinimums and maximums Repayment of the loan Separation from the company


When Are Funds Normally Distributed?

Age 59-1/2 Employee becomes totally and

permanently disabled Employee diesPlan is terminatedEmployee leaves the company


What If You Withdraw Money Early?

Taxes Penalties


What About Hardship Withdrawals?

Medical expenses Purchase of a home College tuition payments Threat of eviction

or foreclosureFuneral expenses

for a family member


Are There Any Disadvantages To a 401(k) Plan?

Funds aren’t insured Benefits are based only on the vested value

of the accountCompany can amend, merge, or discontinue

the plan at any time Employees tend to invest too conservativelyPeople tend to spend their 401(k) money

when they change jobs


What Else Should Employees Know About the 401(k) Plan?

Maximum allowable annual contribution Percentage matched by the company Vesting rulesRules for transfer of funds


What Else Should Employees Know About the 401(k) Plan? (cont.)

When earnings are credited to their account How often statements are provided How to access their account History of investment options


Goals

Be aware of the many benefits of participating in a 401(k) plan

Understand the investment options Know how the plan works, including

the rules for investing, transferring, and withdrawing funds

Be able to explain the 401(k) to your employees


Summary

The 401(k) plan can be an excellent way for employees to save for retirement

401(k) plans have many advantages over other types of savings and investment plans

Employees should realize that they are totally responsible for the growth of their 401(k) account


Summary (cont.)

They need to learn as much as possible about the plan and the investments they make

To reduce risks, wise investors diversify their 401(k) portfolios


Quiz

1. Briefly define a 401(k) plan.

2. Identify four advantages of a 401(k).

3. There is no limit to the amount of money employees can contribute to the 401(k) each year. True or False

4. Company matching contributions must be ___________ before they fully belong to the employee.

5. Employees over age 40 are allowed to make additional catch-up contributions each year to the 401(k).

True or False


Quiz (cont.)

6. Contributions to the 401(k) go into a ___________, and each employee who participates buys __________ in the fund with his or her contributions.

7. Identify three possible 401(k) investment options. 8. The ideal mix of investments changes over the years.

True or False9. If employees contribute to the 401(k), they are prohibited by

law from also contributing to a personal IRA.True or False

10. What happens if an employee withdraws 401(k) funds before age 59 1/2 without hardship as a reason?


Quiz Answers

1. A 401(k) is a savings and investment plan, designed primarily as a retirement plan, that allows employees to make investments with pre-tax income and that defers taxes on earnings until the money is withdrawn.

2. There are numerous advantages to a 401(k), including tax-deferred earnings, reduction in current gross income, automatic payroll deductions, the ability to make one’s own investment decisions, portability, no minimum investments, the option to borrow from the account for certain specified reasons, and matching contributions from the company.


Quiz Answers (cont.)

3. False. There is a limit to the amount of money employees can contribute annually to the plan.

4. Company matching contributions must be vested before they fully belong to the employee.

5. False. Employees age 50 and over are allowed to make catch-up contributions.

6. Contributions to the 401(k) go into a trust fund, and each employee who participates buys shares in the fund with his or her contributions.



7. Possible investment options include stable value funds, company stock, and mutual funds, which may combine investments in money market funds, bond funds, and various kinds of stock funds.

8. True. As employees get older and closer to retirement, experts recommend making more conservative investments.

9. False. Employees may contribute to both the 401(k) and an IRA. However, the amount of their IRA tax deduction may be reduced or limited as a result.



10. The company is required by law to withhold 20 percent of the withdrawn amount for taxes. In addition, the employee must pay a 10 percent penalty to IRS.

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31511230/0503 Business & Legal Reports, Inc. BLRs Human Resources Training Presentations Explaining...

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