Encourage Plan Participation, Discourage Loans: CNN Video and Article. If you’re looking for ways to bolster retirement plan participation and discourage loans, a new article from CNN Money may help. It not only contains four important reminders about why it’s a bad idea to take a 401(k) loan, it also starts off with a short, engaging video about retirement planning that’s likely to resonate, especially with younger employees.
Called “Planning Young: A Retirement Roadmap” the video weighs in at about a minute and a half and is a simple overview of why it’s important to start saving early. It reminds employees in their 20s, 30s, and 40s what they should be focusing on in terms of savings goals. For those just starting their careers, the video emphasizes the importance of contributing enough to their employer’s 401(k) to get the match as soon as they are eligible. It also encourages early savers to make their contributions automatic and increase them with every pay raise. “Planning Young” also advises younger workers to be aggressive with their investments because they have time to take bigger risks.
For employees in their 30s, the video emphasizes the importance of consistent savings, along with the addition of other savings vehicles outside of a 401(k), such as a Roth or traditional IRA. And for 40-plus savers, “Planning Young” mentions the importance of thinking about risks and how much stock exposure they can stomach as they get closer to retirement.
The main takeaway? “Save as much as you can, as early as you can, for as long as you can.” Since younger employees have the most time on their side, it may be the perfect way to engage them and help them understand why it’s so important to start saving as much as they can as soon as they can in their employer-sponsored retirement plan.
“Planning Young” could easily be incorporated into your participant education and communications plan, perhaps as part of an email campaign or as the introduction to an enrollment meeting, for example.
The article itself may also be a helpful tool to have in your arsenal to discourage participants from borrowing from their 401(k) for a near-term financial emergency. It outlines four reasons why it’s best to just leave the money where it is, including:
- The hefty taxes and penalties: Workers who don’t comply with established repayment rules — with very rare exceptions — could get hit with federal and state income taxes, not to mention early withdrawal penalties if they borrow the money before age 59 1/2. The total tax bill could be as much as 40% of the amount withdrawn — ouch! Assuming they can repay the loan without issue is a mighty big gamble for employees to take.
- Potentially not being able to leave their job, or having to repay the loan early: Neither option is appealing, but there isn’t much choice for employees with an outstanding 401(k) loan. They either have to repay the loan before quitting or leaving their employer for a new career opportunity, or the IRS will be notified of the outstanding balance, and they’ll be forced to repay that loan right away, with taxes and penalties. And for those who are laid off unexpectedly, the double whammy of taxes and early withdrawal penalties could result in an even bigger financial hardship.
- Missed earnings on their investments: Since their money isn’t invested — essentially, it’s “out of the market” during the time the loan is outstanding — employees miss out on the potential gains those investments could yield. They also won’t benefit from compounding, where in simplest terms, the money in their account grows to make them more money over time. That’s a lot of missed opportunity to grow their savings, and educating plan participants about what they’re missing out on when they take a 401(k) loan may be a good way to at least get them to think twice about doing so.
- Costly taxes and fees: Loans are repaid with after-tax money, and then those dollars are taxed again when withdrawn from the account at retirement. So employees who borrow from their retirement plan account have to pay taxes on that money twice. What’s more, 401(k) loans aren’t tax-deductible, which means that if they’re being used for a down payment on a house or to pay off student loans, workers can’t take advantage of the tax deductions they’d normally be entitled to. Finally, it costs money to take a retirement plan loan, and those fees can be higher than a conventional loan — more food for thought for employees weighing the pros and cons of borrowing from their retirement savings.
We wrote another article earlier on the pitfalls of 401(k) loans, which you can read here. In any case, here’s some more well-meaning information you can use to encourage your participants — especially younger ones — to save for retirement early and often, and help them understand why it’s so important to leave their savings in their account until that all-important retirement date.
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