Emplopyers Should Know about 401 (K) Vesting Schedules

Presented by Marc Aarons

I hope this finds you well today. I’m reaching out today to touch on the importance of vesting schedules when designing a 401(k) plan for your business and employees. With 88% of workers saying a 401(k) plan is a must-have benefit when looking for a new job, making the right choice as an employer can be the difference between attracting and retaining top employees or being passed over for a competitor.

My hope is that this email will help you explore the benefits, drawbacks, and different options available to employers like you.

By way of reminder, vesting schedules determine when employees gain ownership of employer contributions to their 401(k) accounts. Understanding how they work can help you:

• Boost Retention: Vesting encourages employees to stay with the company longer, reducing turnover costs.
• Motivate Participation: Vesting creates a sense of shared ownership, potentially increasing employee contributions.
• Manage Costs: Forfeited contributions from departing employees can offset plan administration or be reallocated to remaining participants.

However, there are also considerations:

• Recruitment Challenges: Strict vesting schedules can make attracting top talent, especially younger workers, more complex.
• Employee Morale: Long vesting periods can create a feeling of delayed gratification.
• Compliance: IRS regulations limit vesting schedules (three years for cliff vesting and six years for graded vesting).

Vesting Schedule Options:

• Cliff Vesting: Employees gain full ownership after a set waiting period. The length of the cliff is determined by the company and is outlined in the employment agreement. For example, a four-year vesting schedule may require a one-year cliff (a total of five years) before the agreed-upon stock options become fully accessible to the employee.
• Graded Vesting: Ownership increases gradually over time (often three to six years). This fosters a sense of growing ownership but can be more complex to communicate.

Key Considerations:

• Company Culture: Tailor your vesting schedule to your company’s demographics and culture. Younger workforces may respond better to faster vesting.
• Industry Standards: Research vesting schedules in your industry to remain competitive in attracting and retaining talent.
• Legal and Tax Implications: Consult with professionals to ensure your vesting schedule complies with IRS regulations and integrates with your plan document.

With this in mind, make sure you have a way to educate employees about vesting schedules during enrollment and throughout their employment. You’ll also want to revisit your vesting schedule periodically to ensure it remains competitive and effective.

As always, if you have any questions or need further assistance about this topic or anything related to your group benefits, please don’t hesitate to contact me.

Please don’t hesitate to reach out with any questions or concerns.

Marc Aarons may be reached at 714-887-8000 or Email Marc

Money Managers inc. Website

This communication is from Money Managers, Inc.; a Securities and Exchange Commission registered investment advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results.  Investments involve risk and are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.

The post What Employers Should Know About 401(k) Vesting Schedules appeared first on Money Managers, Inc..

Provided by Marc Aarons @ Money Managers Inc.

Households are saving too little for the future. According to one new analysis, 41% of Gen Xers and 42% of baby boomers have yet to begin saving for retirement. In a recent financial industry survey, 35% of small business owners said they were planning to use the sale proceeds from their company for a retirement fund, an idea which comes with a flashing question mark.^1,2

Do you need to build retirement savings? Take a look at these retirement plans:

SEP-IRA: low fees, easy to implement and maintain. These plans cover sole proprietors and their workers with no setup fees or yearly administration charges. Your business makes all the contributions with tax-deductible dollars. The amount of the contribution your company can deduct is the lesser of your contributions or 25% of an employee’s compensation. You can even skip contributions in a lean year.^3,4

SIMPLE IRAs and 401(k)s: low maintenance, high contribution limits. In contrast to SEP-IRAs, Savings Incentive Match Plan (SIMPLE) IRAs are largely employee-funded. A worker can direct as much as $12,500 or 100% of compensation (whichever is less) into a SIMPLE IRA per year. That current $12,500 annual contribution limit rises to $15,500 for plan participants 50 and older. Matching employer contributions are required: you can either put in 2% of an employee’s annual compensation, or match employee contributions dollar-for-dollar up to 3% of the employee’s annual compensation.^2,4

Does your company have less than 100 workers? Do you want a 401(k) plan that is relatively easy to administer? The SIMPLE 401(k) might do. This is a regular 401(k) with a key difference: the employer must match employee contributions in the manner described in the previous paragraph. As with the SIMPLE IRA, employee contributions are elective. Contributions to a SIMPLE 401(k) vest immediately. While you must file a Form 5500 annually with the I.R.S., no non-discrimination testing is necessary for these 401(k)s.^2,4

Solo 401(k)s: a great way to “play catch-up.” Both pass-through firms and C corps can install these plans, which allow a solopreneur to contribute to a retirement plan as both an employee and an employer. In 2018, a business owner can direct up to $55,000 into a solo 401(k). As with a standard 401(k), participants age 50 and older can make a $6,000 catch-up contribution each year. If you are 50 or older, your maximum annual contribution could be as large as $61,000.^2,5,6

If you are behind on retirement saving, a solo 401(k) presents an outstanding opportunity to help you grow your retirement fund. The catch is that your business must be very small and stay that way. You can only have one employee besides yourself, and that employee must be your spouse. Solo 401(k)s do need plan administrators, but no Form 5500 is needed until the plan assets top $250,000. If you have a corporation, your solo 401(k) contributions are characterized by the I.R.S. as business expenses. If your business is unincorporated, you may deduct your solo 401(k) contributions from your personal income.²

The solo 401(k) offers even more savings potential for a married couple. Your employed spouse can make an employee contribution to the plan (limit of $18,500/$24,500 annually), and you can then make a profit-sharing contribution of up to 25% of his or her compensation as the employer. You can even have a Roth solo 401(k).^4,6

Roth and traditional IRAs: the individual retirement planning mainstays. These accounts currently let you save and invest up to $5,500 a year ($6,500 a year if you are 50 or older). Both permit tax-advantaged growth of the invested assets. With a Roth IRA, contributions are not tax-deductible, but distributions are tax-free provided I.R.S. rules are followed. Roth IRAs never require mandatory withdrawals when you reach your seventies. Withdrawals from traditional IRAs are taxed as regular income, but contributions are often fully tax-deductible; withdrawals must begin when the account owner is in his or her seventies.^2,7

Roth and traditional 401(k)s: the small business standard. These plans now have annual contribution limits of $18,500 ($24,500 for those 50 and older). Your 401(k) contributions reduce your taxable income. Assets within all 401(k)s grow with tax deferral. Some 401(k) plans now feature a Roth option. The rules for Roth 401(k)s mirror those for Roth IRAs, with a notable exception: Roth 401(k) plan participants usually must begin taking mandatory withdrawals from their accounts once they reach age 70½.^8,9 

Contact the financial professional you know and trust today about these plans. You must build adequate retirement savings for the future, and your prospects for retirement should not depend on the future of your business.

Marc Aarons may be reached at 714-887-8000 or marc@ocmoneymanagers.com

www.ocmoneymanagers.com

MMI Disclosures

Citations.

1 – fool.com/retirement/2018/01/29/guess-how-many-gen-xers-and-baby-boomers-have-no-r.aspx [1/29/18]

2 – inc.com/hr-outsourcing/best-retirement-plans-for-small-businesses.html [2/2/18]

3 – irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps-contributions [10/25/17]

4 – trustetc.com/resources/investor-awareness/contribution-limits [2/6/18]

5 – irs.gov/retirement-plans/one-participant-401k-plans [10/25/17]

6 – nerdwallet.com/blog/investing/what-is-a-solo-401k/ [7/24/17]

7 – cbsnews.com/news/new-tax-law-roth-vs-traditional-ira-or-401k/ [2/6/18]

8 – investopedia.com/ask/answers/112515/are-401k-contributions-tax-deductible.asp [1/30/18]

9 – forbes.com/sites/greatspeculations/2017/03/17/__trashed-55/ [3/17/17]

^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.}

The post Retirement Plans for Individuals & Businesses: A look at some of the choices. appeared first on Money Managers, Inc..

Companies are luring & retaining employees with this key perk.

Provided by Marc Aarons @ Money Managers, Inc.

What do your retirement plan participants wish you would offer? Besides the chance to save and invest part of their paychecks, that is?

The answer could be “a little more help.” Last year, Charles Schwab surveyed workers contributing to the 401(k) programs it provides, and 46% wanted help “calculating how much I need to save for retirement.” Forty-three percent wanted assistance in “determining at what age I can afford to retire,” and 39% listed “figuring out what my expenses will be in retirement” as an item on their financial to-do list. Others wanted help with day-to-day financial matters, such as debt management and budgeting.

Companies with 401(k), 403(b), and 457(b) plans are starting to respond. At some firms, basic enrollment pep talks on consistent contribution and explanations of asset allocation have been supplemented by degrees of financial coaching. This year, 59% of employers responding to an Aon Hewitt survey on the topic said that they were very likely to offer workers some form of financial wellness program beyond basic retirement saving instruction. This is up from just 30% of employers in 2014.

Financial wellness programs can promote employee retention. When workers have money issues in their lives, both their health and performance may suffer. They may try to find a higher-paying job, effectively reducing their commitment to their current one.

Fundamentally, these programs teach financial literacy. Most people need more of that, including high earners. Corporations such as Activision Blizzard, Havertys Furniture, Home Depot, and Waffle House have installed such programs, and made them free to employees wanting insight on everything from handling student loan debt to college planning to make long-term care insurance choices.

Small businesses are offering these programs, too. Financial services professionals are coming forward to work with established and emerging companies seeking a perk to attract first-rate employees. This financial coaching can take many forms, from group education to highly individualized counseling with the financial consultants assuming a fiduciary duty. Businesses would do well to ask about it, as employee loyalty is priceless.

Plan sponsors may also potentially lower their fiduciary risk by putting such programs into place. If employees change their financial behaviors and believe that they are improving their personal finances as an effect of a financial wellness program, they may be less inclined to complain about a company’s retirement plan offering – or worse, initiate legal action on grounds that the plan sponsor failed to meet its fiduciary responsibility. No business wants that.

Does your company lack a financial wellness program? Consider establishing one in the near future. If your competitors have not yet taken that step, chances are they soon will.

«representative name» Marc Aaron, 714-887-8000 or marc@ocmoneymanagers.com

^{MMI Disclosures}

 ^Citations.

^{1 – tinyurl.com/yapwrg4d [6/11/17]}

^{2 – marketplace.org/2017/07/11/business/companies-offering-financial-wellness-programs-perk-job [7/11/17]}

 ^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.}

The post Do You Have a Financial Wellness Program? appeared first on Money Managers, Inc..