The stock market has taken investors on a roller coaster ride in 2020. That volatility isn’t expected to ease up as we continue to adjust to a world dominated by the COVID-19 pandemic. Even though there will be more down days in the future, the market will come back. In fact, stock markets historically rebound within a year of a major drop and are performing at much higher levels within a few years after a financial crisis. That means that although it seems counter intuitive, now is the time for companies and their employees to focus on their 401k plans.
Business owners and employees who have the ability to invest in their 401k plans now will see major upside in the long term.
By establishing or enhancing 401k plan offerings, companies can ensure that their owners and employees become 401k millionaires by the time they retire. Talk about a nice benefit!
Creating a 401k plan and encouraging participation is good business. This investment in your employees will improve retention and recruiting efforts because you’re demonstrating a commitment to your team. Additionally, it communicates that your company cares about your employees and their long-term financial goals.
Send a positive message about the value of saving for the future and in doing so, you’ll likely recruit and keep talented people to help your company soar.
There are a number of steps an employer can take to encourage participation in a 401k plan. First, of course, is establishing a 401k plan for your employees. When creating or updating your 401k plan, offer an employer match or profit-sharing component. You could even offer both! These moves will help your employees save even more for retirement and establish a deeper sense of investment on their part. Your team will want to exceed their goals because the company’s success will directly impact their retirement savings.
Offering an employer match or profit-sharing component are strong recruiting and retention tools as well. They’re perceived as valuable benefits and a metric many employees use for evaluating job opportunities.
Businesses can further encourage participation and retirement savings in how you design your 401k plans. Consider setting automatic enrollment for employees. You can start the automatic enrollment at a relatively low percentage, such as two percent, so all employees are saving something. If someone wants to save more, they can adjust their enrollment percentage higher. At the very least, you’ve established a baseline.
You also can set automatic escalations so that every time an employee receives a salary increase, their 401k is adjusted as well.
Finally, consider including a qualified default investment alternative (QDIA) in your plan. This can be set as a default in the 401k for employees who have not made investment choices or do not feel qualified to make investment choices. A QDIA ensures that they can still yield the benefits of the plan and won’t miss out on the savings.
A 401k plan isn’t good business just because it benefits employees. There are many advantages for companies and business owners too. For example, a company may be eligible for tax deductions for matching employee contributions or profit sharing through the plan. Additionally, tax credits are available for companies during the early years of their plan as they can write off some of the administrative costs of a new plan.
It’s important to note that any size company can offer a 401k. It’s not limited to large or publicly traded companies. Cost has often been seen as a detriment to 401k plans and although there are costs associated with establishing and maintaining a plan, they can be minimized. Many national 401k plan administrators offer low cost options, especially for small businesses.
Speaking of small businesses, 401k plans are a fantastic retirement tool for small business owners. You can access many tax benefits when using a 401k and save significant amounts of money for retirement.
5 Habits of a 401k Millionaire
Once you’ve established a 401k plan and encouraged your employees to participate, now it’s time to start saving!
There are five key habits to become a millionaire through your 401k contributions:
- Save Early and Make It Automated: Start saving as early as possible. A bi-monthly 401k contribution for someone 30 or 40 years away from retirement is a fraction of that contribution for someone 20 years from retirement. Make those contributions automatic so you don’t have to think about them. You also won’t miss the money because it’s automatically taken from your paycheck and deposited into your 401k account.
- Leverage the Employer Match: Supercharge your savings by taking advantage of the employer match. It’s free money, so don’t leave it on the table.
- Increase Contributions: As you grow in your career and get raises and promotions, increase your 401k contribution along with them.
- Don’t Touch It: Retirement accounts should be used for just that… retirement. Even if you’re tempted, don’t raid your 401k account to pay for other expenses. That money should be off limits. You’ll be hit with penalties and won’t make your 401k millionaire status if you take money from the account.
- Invest in Low Cost Funds: There’s been a revolution in low cost and diversified mutual funds and ETFs in recent years. Look for a low cost option that will help you save more in the long-term. Pay attention to a fund’s expense ratio. The lower you can keep this, the more money you’ll save.
Saving for retirement is a wise decision that will pay dividends for decades. With the right plan in place, business owners and their employees can become 401k millionaires.
Not only will this ensure a much happier retirement, but companies that emphasize a saving mentality demonstrate that they value long-term employees and the success of their team. If that’s not good business, I’m not sure what is.