6 Frequently Asked Questions about Retirement Plans
As an HR professional, you'll likely field many questions about how retirement plans work. Over time, however, you may find that a few questions are asked most frequently. Here are some questions you may be likely to run across. Keep the answers close by to help you save time.
1. What are the basic types of retirement plans?
The most common type of retirement plan is a traditional 401(k). This allows an employee to contribute pretax or Roth dollars into a retirement account. Employers then have the opportunity to match part or all of the employee's contributions. Here are some other types of retirement plans:
- Profit-Sharing Plans
- SEP IRA
- SIMPLE IRA
- Roth IRA
2. How much money will be deducted from my paycheck?
Everyone has a unique situation when it comes to the amount of money they'll need for retirement savings, and how much they can contribute. Employees may increase or decrease the amount in order to meet their comfort level.
One way to determine how much an employee should plan to save is by using a retirement calculator.
Because approximately 30 percent of eligible workers do not participate in their employer's 401(k) plan, some organizations set up auto-enrollment to encourage participation. Qualified automatic contribution arrangements must set an auto-enrollment percentage of at least three percent of total annual compensation (though it's common to auto-enroll at a higher percentage), and increase by one percent each following year.
3. When am I eligible to contribute to my retirement plan?
Each company has different eligibility requirements. Some organizations allow employees at least 21 years and older to participate in the plan. Other plans become available to employees after 90 days of employment. Most plans will denote a vesting schedule. The answer to this question will vary based on the company’s specific retirement plan design.
4. What does it mean to have vesting benefits?
Vesting means that the employee has earned the right to benefits without the risk of forfeiting them. All employee personal contributions are immediately 100% vested in the plan. For employer contributions, there are typically two vesting schedules: a three-year vesting schedule and a six-year graded vesting schedule. With a three-year vesting schedule, employees must work a full three years before having access to their employer's contributions. With a six-year graded vesting schedule, employer contributions are credited with 20% vesting for each year of qualifying employment.
5. How can I roll over my benefits?
When employees stop participating in one 401(k) plan, they can transfer the money into an IRA or their next employer's qualified retirement plan. They will need to initiate the rollover from their old 401(k) plan. In most cases, there will be a few forms to fill out that will initiate a distribution of their current retirement balance to their new account provider. This is called a "direct rollover".
6. Do I need to wait for an enrollment period to start my 401(k)?
Unlike healthcare benefits, employees are able to change, opt out, or enroll in a 401(k) account at any time.
Circulating a fact sheet to employees is a great way to help answer employees’ questions before they need to ask. You could also host a lunch-and-learn or similar training opportunity to answer common questions about benefits. If you’d like help providing answers to complex employee benefit questions, consider enlisting a third-party organization that includes a dedicated HR professional as part of their service.