The U.S. Social Security Administration estimates that the average American will need from 70 to 80 percent of their pre-retirement earnings to maintain their living standards after leaving the workforce. Are you and your employees saving enough to fund your retirement goals? Here are five things that you and your employees need to know about retirement:
- Mandatory employee contributions. Studies have shown that over 80% of auto-enrolled participants in 401(k) plans do not opt out. Automatic enrollment is one way to get more participants in the Company retirement plan versus requiring that employees enroll in the retirement plan or be left out.
- Auto-escalation of contributions. Similarly, those auto-enrollment plans with an auto-escalation component increasing annual contribution percentages have very few participants who opt out. Auto-escalation of 1% per year up to a contribution rate between 10% -15% is normal.
- Begin employer contributions. Many employers pledge specific contributions to 401(k) plans (3% – 6% is standard).
- Protect employees from themselves. One of the reasons that participant balances aren’t larger is because of poor participant investment option decision-making. Most participants sell equities at the bottom of the market, buy at the top, or leave their money in cash rather than take risks. Think about requiring the use of target date funds or managed accounts for participants.
- Avoid participant loans. One of the worst investment decisions anyone can make is to take a participant loan. Under most circumstances, the interest isn’t tax deductible (unlike a home equity loan), and loan proceeds are double-taxed (loan repayments are made from after-tax earnings, and loan proceeds are taxed again when withdrawn at retirement)
For more information, call Maria Arriola at LSL CPAs, at (714) 569-1000.
