Retirement Plans

Retirement is often the topic of many US workers during the end of their employment years. However, the topic of retirement is most important during the first years of employment. By law, an individual can collect retirement funds from three different sources! There are many retirement options available to both employees and the employers and to make the best decision one must have a basic understanding of the retirement options available. This paper will discuss some of those retirement plans available such as 401(k) plans and individual retirement arrangements (IRS) and what role the Employee Retirement Income Security Act of 1974 plays.

401(k)

Plans

401 (k) plans are defined as contribution plans and were named after the section of the IRC that created them. A 401(k) offers three significant tax benefits. “First, employees do not pay income taxes on their contributions to the plan until they withdraw funds. Second, employers deduct their contributions to the plan from taxable income. Third, investments gains are not taxed until participants receive payments” (Martocchio, 2009, Chapter 11).

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401(k) plans allow employees to decide how much of their salaries (this is done by percentage, ex. 3% of total income) they want to contribute into their account. Some employers also choose to match their employee’s contributions! Besides the tax benefits, if an employee decided to make a career move all contributions can be transferred to the new organizations plan.

As with all things, there are some disadvantages to a 401(k) plan. One disadvantage is that if under the age of 59 ½ it may be difficult to make a withdrawal without having to pay a penalty.

Another disadvantage to a 401(k) plan is that although an organization may match contributions, employer contributions are not vested until after three years after the contribution. Set by the IRS a 401(k) plan also has a maximum contribution limit. Therefore, when it comes to highly compensated employees (employees earning over $100,000/year) a 401(k) may not be the best retirement plan because those employees cannot commonly save at the maximum allowable rates.

Individual Retirement Arrangements (IRA)

As pension plans become a thing of the past, individual retirement arrangements (IRA) become more and more popular. An IRA is a retirement plan set up by an individual on their free will. When considering an IRA, there are two types to consider, the traditional IRA or a Roth IRA, each have distinctive characteristics. According to the “IRS” (2015), “a traditional IRA is a way to save for retirement that gives you tax advantages” (Traditional IRAs). The advantage includes that a traditional IRA can be partially or fully deductible depending on an individual’s circumstances. Also, the amounts in a traditional IRA (earnings and gain included) are not taxed until distribution. A traditional IRA makes a pre-tax contribution, however; there are com limitations to this feature.

The second IRA is a Roth IRA! A Roth IRA offers valuable tax breaks such as tax-free income in retirement. Unlike with a traditional IRA, a Roth IRA does not have an up-front tax deduction if individuals follow rules set in place. Roth IRAs have the potential for individuals to access their contributions (not earnings) at any time tax and penalty free.

A Roth IRA is a good retirement plan for recipients that expect to be in a higher tax bracket in retirement. They are also ideal for young and low-income workers because they will benefit most from years of tax-free compounded growth. A Roth IRA also allows individuals to contribute at any age. As with many things there is a downfall to a Roth IRA, it does have an income eligibility requirement; highly compensated employees can not contribute to a Roth IRA. As of 2014, an individual could contribute up to $5,500 into their Roth IRA.

Roth IRAs also have other benefits such as flexibility, no mandatory withdrawals and saving during retirement. Unlike with a traditional IRA, Roth account holders do not have to start withdrawing contributions by the age of 70 1/2. With a Roth IRA individuals can withdrawal tax and penalty free if they have had their account for at least five years and are at least 59 ½ years old(with the exception of death or disability). There are two things that determine whether an individual can set up a Roth IRA; (1) current year income and (2) tax filing status. Individuals must have an earned income (such as salary or hourly wages). Once an IRA account is set up, you have 15 months to make a contribution. Another perk to a Roth IRA is that non-working spouses can open an account based on the working spouse’s income.

Traditional and Roth IRAs both have their benefits and their downfalls. Both IRAs offer great tax breaks; a Traditional IRA avoids taxes when you add to the account, but a Roth IRA avoids taxes when withdrawing during retirement. With a tradition IRA contributions can be made until age 70 ½ whereas Roth IRA account holders have no age limit. Roth also has an income restriction whereas traditional IRA does not. When deciding on which is most compatible it is important also to consider future tax rates. The major difference between these two IRAs is when it comes to withdrawing contributions. Traditional IRAs require minimum withdrawals by age 70 ½ whereas Roth IRA does not have a requirement on withdrawals.

Employee Retirement Income Security Act of 1974

ERISA is the Employee Retirement Income Security Act of 1974. ERISA "...protects the assets of millions of Americans so that funds placed in retirement plans during their working lives will be there when they retire" ("United States Department of Labor", n.d.). The ERISA requires private organizations (non-government) to make sure participants are informed, give participants the right to sue for benefits, and guarantees payment of a defined plan is terminated or cancelled. Under ERISA employers are not required to offer retirement plans but if retirement plan are offered they must meet minimum standards. ERISA requires that participants are informed with their plan features and funding. ERISA also sets the standards for benefit accrual, anticipation, vesting and funding. ERISA protects all individuals investing in the retirement plans.

Communication Plan

When creating a communication plan, it is important to put yourself in the audiences “shoes”. What do they need or want to know? How can I reach the audience? And what could block communication? Communicating effectively is like marketing your message; the message must be appealing and informative. The benefits must outweigh the negatives, and the audience must be reached through the right communication channels. Understanding your audience is crucial to making an effective communication plan. Once the audience groups are created, and the objective is outlined it is time to relay the message. There are many ways to reach an audience such as e-mail, teleconference, posters, lunch time meetings and team meetings. These methods are suitable to reach new and existing employees. It would also be beneficial to offer retirement information during new hire orientation.

Everyone retains information differently and at different paces, therefore, it would be important to offer the retirement plan information in multiple ways at multiple times. When first implementing these retirement plans it would be beneficial to offer informative meetings for several days at different times to ensure everyone can attend. After initial meetings, it would be important for human resources to make sure that employees know they can turn to their human resources department anytime to get information. In order to reach all of the employees it would be beneficial to utilize email (whether to communicate the actual message or even just meeting information), PowerPoint, and even telecommunication options.

With change, there will always be resistance that is why it is important to be very knowledgeable about the information so that you can educate your employees. Keeping employees informed can help make any transition faster and smoother. To get employees to enroll in a retirement plan, it is important to “sell” them the idea and get them all the necessary information needed to make an educated decision. No one wants to make an important life decision without all of the facts; therefore breaking down all of the retirement information would be very beneficial to convincing employees to enroll.

Conclusion

When retirement approaches there are many options to consider when securing one's self financially. It is important to know all of the facts about all the options available. Learning these facts come from a clear communication plan and open communication. When it comes to retirement plans, the Employee Retirement Income Security Act ensures that employees are informed about their options and their retirement contributions are secured. 401(k) and IRA accounts are just a few of the retirement options available in today’s market. Both IRA and the 401(k) plans offer great tax breaks and withdrawal options. Although, there are some rules that must be followed, these retirement options offer great financial retirement benefits.

References

IRS. (2015). Retrieved from http://www.irs.gov/Retirement-Plans/Traditional-IRAs Martocchio, J.J. (2009). Strategic Compensation: A human resource management approach (5th ed.). Retrieved from The University of Phoenix eBook Collection database. United States Department of Labor. (n.d.). Retrieved

from http://www.dol.gov/ebsa/faqs/faq_consumer_pension.html