The 401(k) Plan of [Name of Company]
How Our Plan Works and Its Benefits for Employees
An Employee Communication Presentation
Introduction
Fewer and fewer employers are offering employees traditional
pension plans that provide for a defined retirement benefit.
Consequently, employees must now take responsibility for
planning their retirement income years in advance of their
actual retirement. To help employees in this effort, many
employers are offering 401(k) plans which allow employees to
make pre-tax contributions for retirement savings and which
may include employer matching contributions. This presentation
is designed to inform you of how our 401(k) plan works.
This sample presentation is intended for presentation to all
employees. It is designed to be presented by an individual who
has knowledge of 401(k) plans and the employer’s own plan. It
is a sample presentation that must be customized to match the
employer’s own 401(k) plan benefits.
©SHRM 2008
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Agenda
The agenda for our meeting today is:
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What is a 401(k) plan?
How our plan works.
Advantages and disadvantages of enrolling in the plan.
When and how to enroll in our 401(k) plan.
The minimum and maximum amounts for contributions.
Employer matching program.
Vesting schedule.
Making changes to elections.
401(k) plan loans and withdrawals.
What happens to the 401(k) plan in the event of a leave of absence or
upon termination of employment.
Tips for participating in our 401(k) plan.
©SHRM 2008
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What is a 401(k) Plan?
What is a 401(k) plan?
A 401(k) plan is a type of employer-sponsored retirement
savings plan that is funded by employee contributions and often
matching contributions from the employer.
401(k) plans derive their name from the IRS Tax Code –
Section 401, paragraph (k). This section of the Code allows for
tax-qualified deferred compensation from employees. These
deferred wages are not subject to income tax withholding at the
time of deferral. This allows the funds to grow tax-free until
withdrawn, at which point they are taxed. 401(k) plans are
generally self-directed and are portable, meaning employees
may transfer them upon changing jobs.
©SHRM 2008
What is a 401(k) Plan? (cont’d)
A 401(k) plan is a defined contribution plan.
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Defined Contribution Plan
An individual account plan to which employees contribute taxfree, and to which the employer may contribute a specific
amount of money that is distributed to the accounts of each
plan participant. Because the benefit is not defined, the
retirement outcomes are not known in advance.
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Defined Benefit Plan
A retirement plan that is managed exclusively by the employer.
It provides vested participants with a fixed periodic benefit or a
lump-sum amount, calculated using specific formulas that
include such factors as age, earnings and length of service.
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How Our 401(k) Plan Works
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The Company’s investment committee selects a variety of funds
for employees to invest in. Investments are made according to
employee selections.
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NOTE: You determine the mix of funds you want to invest in. We
are not permitted to give investment advice; you should consult your
own investment advisor.
If you neglect to make a fund selection, the fund selection will
default to [insert default fund].
When deciding which funds to select, it is a good idea to
consider how far away from retirement you are (5, 10, 20 years
or more) and your own personal level of comfort with risk and
uncertainty.
The funds are then sent to our third-party administrator, [insert
name of administrator], who invests the money in mutual funds,
bonds and money market accounts.
©SHRM 2008
How Our 401(k) Plan Works (cont’d)
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Each year, the Company has a discretionary match of [insert %
match amount here]. You will be entitled to receive an
employer matching contribution for a particular plan year only if
you work at least 1,000 hours during the plan year and you are
employed by the Company on the last day of the plan year.
The funds, like many investments, will fluctuate with the stock
and bond markets.
Vesting schedule:
The term "vesting" refers to your non-forfeitable right to the money
in your account.
> You are always 100% vested in your deferral contributions
account and in any rollover plan’s contributions from a previous
employer.
> For matching employer contributions, you are vested based on
your number of service years.
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©SHRM 2008
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Questions? Comments?
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Advantages and Disadvantages
Advantages of participating in the 401(k) plan
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Because employee contributions are pre-tax, participation
reduces your taxable income. You will see examples of how
this works in the next few slides.
Employer contributions and any increases in the value of your
account remain tax-free until you are ready to withdraw funds.
While the funds may not always grow in a down market or if
you are not in the funds for a long time, the compounding
effect may be significant.
You have control. You decide where to direct your
contributions.
Our company match is like getting extra money in addition to
your own contributions.
©SHRM 2008
Advantages and Disadvantages (cont’d)
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If you change jobs, you can move your account to your new
employer’s plan or to an Individual Retirement Account (IRA).
401(k) plans are protected by ERISA.
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Protected from garnishments or attachments by creditors, except
when dealing with divorce decrees or child support orders
(Qualified Domestic Relations Orders).
Subject to higher limits than personal IRAs.
©SHRM 2008
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Example
The following example is based on an annual salary of $36K with a
401(k) salary deferral of 10% – which represents $38 additional
take-home pay a month!
Without the 401(k) plan
Gross Earnings
With the 401(k) plan
$1,500
Gross Earnings
Pre-Tax 401(k) Deferral
Taxable Income
Payroll Taxes
$1,500
-$375
Net Income
$1,125
Post-Tax 401(k) Deferral
TAKE-HOME PAY
Taxable Income
Payroll Taxes
$1,500
-$150
$1,350
-$338
$1,013
-$150
$975
TAKE-HOME PAY
$1,013
(Payroll taxes calculated to assume a 25% payroll tax rate which encompasses federal and state
taxes, social security and Medicare.)
©SHRM 2008
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Example
This following example is based on an annual salary of $120K and
a 401(k) salary deferral of 10% ($175 additional take-home pay
a month!).
Without the 401(k) plan
Gross Earnings
With the 401(k) plan
$5,000
Gross Earnings
Pre-Tax 401(k) Deferral
Taxable Income
Payroll Taxes
Net Income
Post-Tax 401(k) Deferral
TAKE-HOME PAY
$5,000
-$1,750
Taxable Income
Payroll Taxes
$3,250
$5,000
-$500
$4,500
-$1,575
$2,925
-$500
$2,750
TAKE-HOME PAY
$2,925
(Payroll taxes calculated to assume a 35% payroll tax rate which encompasses federal and state
taxes, social security and Medicare.)
©SHRM 2008
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Advantages and Disadvantages (cont’d)
Disadvantages of participating in the 401(k)
plan
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Your investment options are limited to the funds that we offer.
It is difficult to access your funds before age 59 ½ without
penalty.
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If you withdraw money before reaching age 59 ½, you will have to
pay taxes on the withdrawn amount plus pay a 10% penalty.
Though 401(k) plans are generally a safe and effective method
of saving, if you choose to put your money in risky investments,
your account may not grow as quickly as you anticipate.
Additionally, because funds fluctuate with the stocks and bonds
markets, there will be ups and downs in your savings. All
investment plans carry some degree of risk and uncertainty.
©SHRM 2008
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Questions? Comments?
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Enrollment
When do I enroll in the 401(k) plan?
• Upon Hire
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New hires may enroll effective the 1st of the month after 3 full
months of employment.
Throughout the Year
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Employees may enroll any time throughout the plan year, effective
the 1st of the next month:
• Between 1st and 15th of the month, effective 1st of the following month
(e.g., enroll on 6/1, effective 7/1).
• Between 16th and end of the month, effective 1st of the next month
immediately following change (e.g., enroll on 6/16, effective 8/1).
©SHRM 2008
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Enrollment (cont’d)
How do I enroll in our 401(k) plan?
• You enroll by completing the 401(k) Plan Election/Change Form
in your new hire packet or by downloading enrollment forms
from our intranet. Return the completed forms to Human
Resources.
(Note to Presenter: You will need to revise this portion of this slide if you use a webbased, self-service enrollment tool.)
©SHRM 2008
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Maximum/Minimum Elections
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What is the maximum I can contribute to my 401(k) plan?
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You may contribute any whole percentage of your salary up to the
IRS imposed limit (which for this year is xxxxx). If you are age 50 or
older, you may contribute additional catch-up monies (which for this
year are xxxxx).
What is the minimum I can contribute to my 401(k) plan?
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The minimum contribution is 1% of your base salary.
(Note to presenter: Be sure to fill in the current IRS limits.)
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Employer Matching Program
Employer Matching Program
Each time you make a contribution, the Company matches your
contribution. The match is xxxxx. Both your contributions and
the Company‘s matching contributions are sent to [insert
administrator’s name] at the end of each month and are
invested in the funds you have selected.
The Company contributes the match only during the months
that you make a contribution.
(Note to Presenter: Be sure to fill in match amount.)
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Vesting Schedule
Years of Work –
Vested Percentage of Accrued Employer-Match Benefits
No. of Years of Service
Percentage Vested
Less than 3 Years
0%
At least 3, but less than 4 Years
20%
At least 4, but less than 5 Years
40%
At least 5, but less than 6 Years
60%
At least 6, but less than 7 Years
80%
At least 7 Years
100%
©SHRM 2008
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Questions? Comments?
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401(k) Plan Election Changes
When can I make changes to my 401(k) plan elections?
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You can make changes to the 401(k) plan at any time.
Simply complete the 401(k) plan Election/Change Form by
downloading the forms from our intranet. Return the completed
form to Human Resources.
Changes will be effective the next pay period or the subsequent
pay period, depending on the date you submit changes.
(Note to Presenter: You will need to revise this portion of this slide if you use a webbased, self-service tool.)
©SHRM 2008
Loans
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When you take a loan from your 401(k) account, you are actually
borrowing money from yourself. The interest on your loan is paid
back to your account.
You can borrow up to $50,000 or 50% of your 401(k) plan
balance, whichever is less. The minimum you can borrow is
$1,000.
You may have only one loan outstanding at any given time. If
you have an existing loan, you may not apply for another loan
until the existing loan is paid in full. You may not refinance an
existing loan or obtain a second loan for the purpose of paying
off the existing loan.
You may continue to contribute to the plan while you repay your
loan.
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Loans (cont’d)
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There is a $75 application fee associated with taking a loan
from the 401(k) plan. There are no maintenance fees.
Your loan will bear 1% plus prime interest rate at the time the
loan is processed as determined by the plan administrator
based on prevailing commercial interest rates. The interest rate
will remain the same for the duration of the loan. Interest paid
on your loan is not tax deductible.
You must repay your loans within five years unless it is for the
purchase of your principal residence, in which case you may
repay your loan over a 15-year period. Loan repayments will be
deducted from your paycheck at each pay period. Special
repayment rules may apply if you go on an approved leave of
absence.
Repayments on the loan are on an after-tax basis.
©SHRM 2008
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Loans (cont’d)
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There are no taxes or penalties as long as you repay your loan
on time.
If you do not repay your loan, your loan will be treated as a
withdrawal and you will be required to pay current income taxes
on the balance. Additional penalties may apply if you are under
age 59 ½.
If you terminate employment with the Company before the loan
is repaid, your entire outstanding principal and accrued interest
will be immediately due and payable. If you don’t repay your
loan immediately, you will be deemed to have received a
taxable distribution from the plan, with all applicable penalties.
To apply for a loan, call [plan administrator] to initiate the loan
request. You should receive your check within three weeks from
the time you place your request.
©SHRM 2008
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Withdrawals
Hardship Withdrawals
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With approval from the Plan Administrator, you may withdraw
from your 401(k) plan in order to satisfy any of the following
immediate financial needs:
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To pay unreimbursed medical expenses for you, your spouse or
dependents;
To purchase your principal residence;
To prevent eviction from or foreclosure on your principal residence;
To pay for post-secondary educational expenses (tuition, related
educational fees, room and board) for you, your spouse or
dependents for the next 12 months; or
Any other immediate financial needs as allowed under IRS
regulations.
©SHRM 2008
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Withdrawals (cont’d)
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If you are married, your spouse’s consent may be required for
approval of the withdrawal.
NOTE:
Withdrawals should be your last option. If you take a
withdrawal, you will be required to pay 20% mandatory
withholding tax on your pre-tax contributions, as well as an
additional 10% penalty!
©SHRM 2008
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Withdrawals (cont’d)
Withdrawals after age 59 ½:
• If you are age 59 ½, you may elect to withdraw your entire
vested account balance without penalty.
• If you are married, your spouse’s consent may be required if
any of the assets in your account are attributable to assets
transferred from another plan or have retained protected
benefits.
Withdrawals after age 70 ½:
• You are required to begin to receive minimum distributions from
the plan by April 1 of the calendar year following the calendar
year in which you reach age 70 ½ or you retire, whichever is
later.
©SHRM 2008
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Questions? Comments?
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Leave of Absence and Your 401(k) Plan
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During an unpaid leave-of-absence, neither you nor the Company
will contribute to the 401(k) plan. However, your account will be
maintained and you will continue to participate in the investments
you have selected.
During a paid leave-of-absence, you may continue to contribute
to the 401(k) plan by payroll deduction. Contributions will be
based on your salary during your leave, and the Company will
continue to match your contributions.
©SHRM 2008
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Termination and Your 401(k) Plan
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If you terminate employment, die, become disabled or retire,
your account balance is distributable.
Termination
Upon termination, if your account balance is $5,000 or less, your
account balance will be automatically distributed to you. To avoid
the mandatory 20% withholding tax as well as the additional
10% penalty, be sure to roll over your balance into a qualified
plan within 60 days of termination. Rollover forms will be
available upon termination.
> If your balance exceeds $5,000, you must consent in writing to
receive the distribution from the plan. Your balance will remain with
the plan until you actively elect distribution.
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©SHRM 2008
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Termination and Your 401(k) Plan (cont’d)
Death
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In the event of your death, the value of your account is payable to
your beneficiary. If you are married, your sole beneficiary will be
your spouse. If you are married and you designate a person other
than your spouse as your beneficiary, your spouse must consent in
writing to the designation.
Disability
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If you become disabled while you are a participant in the plan and
you terminate your employment with the employer, you are eligible
to receive a distribution of your account balance.
©SHRM 2008
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401(k) Plan – Tips for Participating
Tips for participating in our 401(k) plan
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The 401(k) plan is intended to be a long-term retirement
savings plan. It is not a bank account to be used for short-term
expenses.
Plan your contributions carefully and diversify your elections.
Review options with a financial planner.
Monitor your balance periodically to keep track of your account.
In a volatile market, you may want to consider revising your
investment options to minimize loss.
©SHRM 2008
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Summary
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A 401(k) plan is an employer-sponsored retirement savings plan
that is funded by your pre-tax contributions and by the Company’s
matching contributions.
The Company’s investment committee chooses the investment
funds. You decide how much money you want to go into your
account and [insert name of administrator] invests the money in
mutual funds, bonds and money market accounts.
Advantages of participating in the plan include reducing your
taxable income; receiving employer matching contributions; and
experiencing growth in your account tax-free until you are ready to
withdraw.
Disadvantages of participating include somewhat limited
investment options and difficulty in accessing funds without
penalties before age 59 ½.
©SHRM 2008
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Summary (cont’d)
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You can enroll in the plan as long as you have worked 3 months
and at least 50% of a full-time schedule. You may make
changes to the plan at any time. You may download forms from
our intranet, and complete and return them to HR to be
processed.
The maximum you may contribute is set by annual IRS limits.
The minimum you may contribute is 1% of your pay.
The Company matches [insert matching amount here].
The Company has a tiered vesting schedule, based on years of
service. After 7 years of service, you are fully vested in the
employer matching contributions. You are always 100% vested
in your own contributions.
©SHRM 2008
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Summary (cont’d)
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You are eligible for loans and withdrawals from the 401(k) plan.
However, there may be fees and penalties involved.
You may be able to continue participating in the plan while on a
leave of absence, depending on if the leave is paid or unpaid.
If you terminate employment, you will be eligible for account
distributions.
You will need to plan your contributions carefully and diversify
your elections to receive maximum benefit from this excellent
way to save for retirement.
©SHRM 2008
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Questions? Comments?
©SHRM 2008
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Evaluation
Please be sure to complete and leave the evaluation sheet you
received with your handouts.
Thank you for your attention!
©SHRM 2008
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