The Paychex Pooled Employer 401(k) Plan

The U.S. House of Representatives passed a bill — Securing a Strong Retirement Act of 2022 — on March 29, 2022, by an overwhelming bipartisan vote, 414-5. The bill, referred to as SECURE Act 2.0, is currently before the Senate for consideration.

Before becoming a law, all differences in the bill would need to be reconciled, which includes sending it back to the House of Representatives to consider changes and then another vote in that chamber before heading to President Biden for signature. Taking these facets into consideration creates an uncertainty on timing of if or when this bill might become law.

SECURE Act 2.0 is the second phase by Congress to offset the retirement savings crisis in the United States. The initial phase, Setting Every Community Up for Retirement Enhancement (SECURE) Act, went into effect Dec. 27, 2019. <

Possible Provisions of SECURE Act 2.0

SECURE Act 2.0 is an attempt to build on the initiatives already started to help a wide range of Americans achieve retirement security and financial wellbeing. It has provisions that include more changes to Required Minimum Distribution (RMD), automatic enrollment, and incentives for plan startup. First, let’s take a quick look at how it may affect your employees.

Changes to Benefit a Multigenerational Workplace

Today’s workplace is more generationally diverse than ever. Older employees are working longer, and Millennials make up roughly one-third of the American workforce. The SECURE Act 2.0 addresses these age groups.

For older employees, the bill would raise the required minimum distribution (RMD) age 72 to 75 — with a phase-in option through 2033 to reach the upper age limit — so they can save for longer. There is also a new catch-up contribution proposed: limits for 401(k) and 403(b) plans would increase to $10,000, while SIMPLE plans would increase to $5,000 (both indexed) for individuals who have reached the ages of 62, 63, and 64.

For younger employees, the SECURE Act 2.0 aims to address two crises: retirement savings and student loan debt. Instead of contributing to a 401(k) or other type of retirement plan, employees can opt to make contributions that go toward paying off their student loans. These contributions would still be eligible for employer matching.

Since today’s workforce includes more part-time workers, they now would be eligible for an employer-sponsored retirement plan. The Act would require employers to allow long-term, part-time workers to defer to their 401(k) plans. Part-time employees would be required to work two consecutive years and complete at least 500 hours of service in each year, a change from the original SECURE Act’s three-year rule. The bill also proposes to simplify and increase the “Savers Credit” which provides millions of low and middle-income individuals with an incentive to save for retirement each year.

Automatic Enrollment to Encourage Participation

Automatic enrollment in a retirement plan is designed to make it easier for employees to participate. The bill would require smaller businesses with 401(k) and 403(b) plans automatically enroll employees. Employees who prefer not to participate can opt out. The initial enrollment amount is 3 percent with an incremental increase of 1% annually until the limit of 10% is reached. There is an exception for small businesses with 10 or fewer employees, new businesses less than 3-years-old, churches, and government agencies. To add even more convenience, businesses could integrate automatic enrollment with payroll.

Increased Tax Credits for Small Business Start-ups

For start-up businesses with up to 50 employees, the current tax credit is equal to 50% of administrative costs, capped annually at $5,000. Under proposals in SECURE Act 2.0, the 50% would be increased to 100% for those businesses.

In addition, the bill would give employees a $1,000 tax credit in the first year of a defined contribution plan, phased down gradually over five years.

Reduced Penalties to Make Compliance Easier

Being compliant with tax regulations can be a challenge for businesses. As currently written, SECURE Act 2.0 would allow businesses and taxpayers to avoid harsh penalties for inadvertent errors within the grace period. It would also protect retirees who unknowingly receive retirement plan overpayments.

What's Next?

SECURE Act 2.0 is still only a bill and not law. Paychex will continue to monitor its progress and provide updates when available. In the meantime, contact a Paychex retirement specialist to learn how your business can take advantage of the original SECURE Act and Paychex Retirement Services.

Note: For more information on this topic, please read our whitepaper, "The Pooled Employer Plan (PEP): The Future of Small Business Retirement."

Many retirement experts are calling the Pooled Employer Plan (PEP) the most revolutionary change to retirement since the 401(k) was launched in the 1970s. The PEP has the potential to be a game changer for millions of Americans who currently don't have a way to save for retirement.

According to the U.S. Bureau of Labor Statistics, approximately 38 million private-sector employees don't have an employer-sponsored retirement plan. Businesses with under 100 employees are less likely to offer retirement plans than larger companies. The Department of Labor hopes to reverse this trend with the PEP. It levels the playing field by giving smaller businesses advantages that are typically reserved for large companies.

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What is a Pooled Employer Plan?

A Pooled Employer Plan is a multiple-employer plan designed to take many administrative burdens off employers' hands. Traditionally, businesses in multiple employer plans had to be related by industry or association (such as a trade group). This made it easier for them to share a single plan and not have to file separate Forms 5500 or do individual audits. Now, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, Pooled Employer Plans do not require participating employers to be related, and a professional Pooled Plan Provider (P3) takes on most administrative responsibilities. This alleviates the burden of plan management and decreases fiduciary liability, making it more attractive to smaller businesses.

Who qualifies for a PEP?

In general, two or more unrelated small businesses can come together to join a PEP, regardless of where they operate in the U.S. or their trade (per the SECURE Act). This setup is particularly advantageous for small to mid-size businesses. Keep in mind that providers may have specific criteria and PEP eligibility requirements that businesses must meet to join the plan.

Can I customize my PEP?

Some PEP providers offer options for plan design features such as eligibility and vesting alternatives, optional matching contributions, a safe harbor provision, Roth and pretax contributions for participants, auto-enrollment and auto increase, and profit-sharing options. Otherwise, PEPs limit the ability for customization.

Why should I get a PEP for my business?

A Pooled Employer Plan is a great solution if you don't currently offer a retirement plan but have considered doing so, or have a plan and are looking to significantly reduce your involvement with plan administration. It's a professionally administered retirement plan that includes reduced fiduciary liability, simplified plan administration for employers, and potential savings due to the pooling of resources. Additionally, you can integrate payroll with your retirement plan to achieve even higher levels of efficiency, accuracy, and cost savings with this employee benefit.

5 biggest benefits of a PEP

Small businesses stand to benefit significantly from a Pooled Employer Plan, particularly if they have previously experienced barriers to entry with establishing a traditional 401(k) plan in the past.

Potential administrative cost savings for employers

In a 2017 study from the Pew Charitable Trust, smaller businesses cited cost as the biggest obstacle to offering an employee retirement plan. By pooling assets into a single, large plan, employers may save on administrative costs and achieve economies of scale.

Less fiduciary risk

Because the P3 assumes most fiduciary responsibilities, employers are not subject to the same level of liability. However, to be sure the plan is problem-free, it's important to choose a P3 that will maintain professional standards such as acting in the best interests of the participants, meeting plan deadlines, and carrying out general duties.

What the Pooled Plan Provider does for you

Many businesses don't have the time, technology, or infrastructure to carry out the duties of retirement administration. The Pew Charitable Trust study found that lack of administrative resources was the second biggest obstacle to offering employees a quality retirement plan.

The PEP directly addresses this challenge. The plan is a "do it for you" approach where the P3 manages administration, monitoring, and reporting. Employers don't have to worry about plan setup, coordinating with vendors, filing Form 5500, employee enrollment, or any of the many complexities of 401(k) plan management. Although the plan is managed by the P3, employers still have control over things like defining matching levels and contribution limits, and ensuring the plan is performing to meet employees' needs. Some employers may prefer more hands-on involvement, but for those who want a plan that can practically run itself, a PEP is ideal.

Tax credit opportunities

To offset startup costs, the SECURE Act provides that eligible employers may be able to receive up to $5,000 in tax credits annually, with an additional $500 tax credit available for using automatic enrollment in the plan, for the first three years that the plan is effective. While this can apply to any new 401(k), it is particularly powerful when applied to the already economical PEP.

Your employees will like the plan too

Last but not least, the reason you're doing this in the first place — your employees. In the age of COVID-19, employees may need stability in uncertain times and to feel that their future is secure. As their employer, you can help provide them with peace of mind by making a high-quality retirement plan like the popular 401(k) more accessible and easy to afford.

Look for a P3 that provides your employees with tools to help them manage their plan. This may include online auto-enrollment, or an employee portal where they can check their retirement readiness and manage their account.

Financial advisors and CPAs will also enjoy the benefits of being able to recommend a simpler plan to clients of all sizes. The PEP is a win-win for employers, employees and their families, and professional advisors who want to help their clients set up a high-quality retirement plan.

What is the difference between a PEP and other 401(k) plans?

While a PEP maintains two or more businesses' 401(k) plans, there are distinct attributes between a Pooled Employer Plan and a 401(k) plan offered by a single employer. In general, a 401(k) gives you more control, but it can be more complex to administer and requires more work from you as the employer. Alternatively, a P3 administers the PEP, so you have less control but also reduced cost and liability. The table below provides some additional comparisons.

With so many benefits of a PEP, it's a great time to set up a plan with a leading provider and take advantage of the opportunities for you and your employees. Learn more about the range of retirement services available today that are built specifically for small and mid-size businesses.

Among the most popular employee benefits that appeals to both job candidates and employees is a 401(k) plan. This unique savings account allows participants to contribute a portion of their wages on a pre-tax basis, and it offers several other benefits that can help build savings for the future.

What Is a 401(k) Plan?

A 401(k) plan is a specific type of retirement savings account that is regulated by the IRS. Individuals are allowed to contribute up to a specified amount each year, and all funds in a 401(k) plan are eligible for tax benefits. Many 401(k) plans are administered through a sponsoring employer, allowing employees to contribute funds to their plans on a pre-tax basis. This makes it simple for many employees to save for retirement.

Are There Different Types of 401(k)s?

401(k) plans refer to any plan governed by subsection 401(k) of the Internal Revenue Code. While these plans all have similar requirements and limitations, the IRS code does have flexibility for different types of 401(k) plans.

Individuals can receive tax savings from several types of these retirement plans, including:

• Traditional 401(k): The traditional version of a 401(k) plan can be offered by employers of all sizes and has some flexibility in how much both employees and employers contribute to the plan, up to the limitations set by the IRS Code.
• Pooled Employer Plan: The Pooled Employer Plan (PEP) allows employers of any size to pool assets into a 401(k) plan administered by a professional Pooled Plan Provider (P3). It’s ideal for businesses who want an easy-to-manage, turnkey 401(k) plan with less cost, simplified administration, and reduced fiduciary risk.
• Roth 401(k): This plan combines the features of a Roth IRA and traditional 401(k), allowing employees the option of contributing after-tax dollars to the plan, thus avoiding later taxation.
• Solo 401(k): Often referred to as a "self-employed 401(k)," this plan is specifically designed for employers who have no full-time employees other than the business owner and spouse.
• Safe Harbor 401(k): Typically offered to highly compensated employees who own a percentage of the company, this plan stipulates that employer contributions are fully vested immediately upon contribution, therefore avoiding many of the annual compliance tests required by other 401(k) plans.
• Simple 401(k): To qualify for this plan, the sponsoring employer must have 100 or fewer employees and not have any other retirement plans offered. Simple 401(k)s restrict the employer to certain contribution and filing requirements.
• Profit-sharing: This unique plan allows employers to contribute on behalf of the employee based on the profits of the company; only the employer can make contributions to this plan. Employee elective contributions are not allowed.
• 403(b): These plans are similar to 401(k) plans, but can only be offered to employees of nonprofit organizations or certain government employers.

How Does a 401(k) Work?

Traditionally, 401(k) plans are set up through an employer in association with other benefit options. When employees become benefits-eligible, some plans utilize an auto enrollment feature, or they will sign up for the plan and set their designated 401(k) contributions as part of the benefits enrollment process. Self-employed individuals can also enroll in a solo 401(k) through a qualified broker.

Once the plan is initiated, the employee's designated contribution amounts are processed through payroll deduction on a pre-tax (or post-tax for a Roth 401(k)) basis. The employer will take the payroll deduction amount and any employer match contributions and deposit the funds into the employee's designated account.

After the contributions are made, employees typically have access to an online portal where they can track the account value and performance over time, choose designated investment percentages (if offered through the employer's plan), or borrow money against the value in the account.

Rules of a 401(k): Withdrawals and Transfers

Since 401(k)s are designed to be a long-term savings vehicle for retirement, withdrawing or transferring money in and out of the account isn't a simple process. Most withdrawals from individuals below age 59 ½ will incur an early withdrawal penalty, and there are also tax implications to consider. In most cases, the money was initially contributed to the account before taxes, so the distribution is taxable, and the individual will incur an additional penalty from the IRS once they've withdrawn funds.

Fortunately, you can make a penalty-free 401(k) withdrawal if:

• You are taking a qualified disaster distribution of less than $100,000 due to certain FEMA-declared disasters You are withdrawing from a tax-deferred account and are a named beneficiary, a qualified reservist, permanently disabled, or have reached age 59 ½; or
• You are withdrawing from a Roth account that has been open for at least 5 tax years and are a named beneficiary, a qualified, reservist, permanently disabled, or have reached age 59 ½.

In some cases, you may want to transfer money out of an existing 401(k), such as when you change jobs to a new employer. A cash-out of the account will typically result in penalties and taxes, but transferring to another 401(k) account or performing a 401(k) rollover can help you avoid those deductions.

While you can't transfer funds from a 401(k) account to your personal savings account penalty-free, you can avoid most penalties by transferring the funds to another qualified retirement account, such as an IRA.

Rules of a 401(k): Contributions and Limits

The IRS regulations that govern 401(k) plans also specify how much an individual can contribute to a plan per year. These restrictions are designed to prevent abuse of these plans by highly compensated employees and encourage early retirement planning. These contribution limits are adjusted periodically for inflation, and updated numbers are published on the IRS website.

The 401(k) contribution limits for 2022 are:

• $14,000 per year in elective deferrals for a SIMPLE 401(k)
• $20,500 per year in elective deferrals for traditional 401(k) and safe harbor plans
• $3,000 per year in catch-up contributions for a SIMPLE 401(k) if the employee contributing to the plan is age 50 or older
• $6,500 per year in catch-up contributions for traditional 401(k) and safe harbor plans if the employee contributing to the plan is age 50 or older
• $61,000 per year in total contributions (employee elective deferrals and employer contributions combined)
• $67,500 per year in total contributions (employee elective deferrals plus catch-up contributions and employer contributions) for employees age 50 and older

Employers can elect to match employee contributions as an additional employee benefit, but this is not required, and any employer match is subject to the total contribution limits listed above.

Nondiscrimination Requirements

When employers offer 401(k) plans to employees, those plans are subject to obligations and tests from the IRS to ensure the plan is complying with the tax code. These obligations and tests are designed to ensure that owners and partial owners — often referred to as "highly compensated employees" — cannot use 401(k) plans as a way to shelter company profits or otherwise unfairly benefit compared to non-key employees.

A traditional plan must comply with:

• Average Deferral Percentage ("ADP") test: This test compares the deferrals of highly compensated versus non-highly compensated employees.
• Average Contribution Percentage ("ACP") test: This test compares employer matching contributions and employee after-tax contributions for highly compensated versus non-highly compensated employees.
• Top-Heavy Test: This test evaluates the overall benefits in the plan for key employees such as owners and officers compared to benefits received by non-key employees.

Pros and Cons of a 401(k) Plan

Creating a savings plan is an important part of preparing for retirement. Like any savings tool, there are pros and cons to using a 401(k). For many employees, 401(k)s are one of the best retirement planning vehicles for maximizing savings but investing in general involves some amount of risk.

Before investing in a 401(k), you should be aware of the most common pros and cons associated with this type of retirement savings plan.

Pros

• Employers can match contributions (although it is not required), essentially giving employees free money.
• Employers also can make a profit-sharing contribution that is not tied to employee deferrals
• All plans must meet strict legal standards designed to protect your money and your interests.
• You may be able to borrow against funds in your account in the event of a financial emergency instead of paying interest to a bank or other financial institution.
• Most plans allow you to defer income taxes until the funds are withdrawn.

Cons

• You may have limited investment options.
• You will typically be charged additional penalties to access your money before age 59 ½.
• Since money typically goes in tax-free, you must pay taxes even once you reach retirement age, which could be when you need your money the most.

Getting Started With a 401(k)

When saving for your retirement, employers may need some guidance, such as deciding between a Simple IRA vs 401(k) plan. For employees, the enrollment process may vary within different organizations, and different companies may also have different waiting periods for new hires before they are eligible to participate.

Eligible employees are required to receive a summary plan document which provides information about their plan and its available options. If they're not sure how much to save each paycheck, provide them resources such as a 401(k) calculator to help them estimate both expected contributions and account earnings over time.

Conclusion

For many individuals, 401(k)s are a simple way to begin saving for retirement with a tool that can help their money work harder These retirement plans offer numerous benefits in the form of tax deferred savings and investment options for future income potential. Although there are some considerations with investing, a well-informed employee can use this as a smart way to build a healthy nest-egg for the future.

One of the best tactics for attracting and retaining good employees is to offer competitive benefits, and one of the most popular benefits today are retirement plans. Not only that, many states today are now mandating that businesses offer them.

The good news is that offering a retirement plan — if you don’t already — has many advantages as an employer, and there a variety of offerings to choose from, each of which are designed to meet unique savings goals, company sizes, and monthly budgets. Here are just a few of the employer advantages of offering a retirement plan:

Employer-sponsored retirement plan options

In order to select the right plan for your employees, and for your organization as a whole, it’s important to know about various types of employer-sponsored and non-employer-sponsored plans, and how each of these plans differ. Employers have a variety of retirement plan offerings across several categories, including defined benefit plans, defined contribution plans, traditional retirement plans, and non-traditional retirement plans. Each of these plans are designed to meet unique savings goals, company sizes, and monthly budgets.

Although employers below a certain size and in certain states are not required to offer their employees a retirement plan option, many employers choose to offer these plans as an employee recruiting and retention tool. Employer-sponsored plans can be offered to employees at little to no cost to the employee while offering important tax incentives to employers, making them an attractive addition to any employee benefits program. To make plans even more attractive to employees, employers may offer matching contributions, though this is not required. Employer-sponsored plans can include 401(k) plans, SIMPLE IRAs, SEP plans, profit-sharing plans, employee stock ownership plans, 457 plans, cash-balance plans, and non-qualified deferred compensation plans.

401(k) plans

401(k) plans are one of the most popular employer-sponsored plan types because of their low cost, ease of setup, and overall flexibility. Employers that offer 401(k)s to their employees may qualify for tax incentives, and employers have some flexibility in setting matching options for their employees.

401(k) plans are a defined-contribution plan, where employees contribute a defined amount each pay period. The employer handles the administrative work of deducting the contributions, adding them to the employee's designated 401(k) account, and contributing any match or profit sharing contributions as outlined in the plan document. .

SIMPLE IRA plans

Small businesses with 100 or fewer employees may opt to provide employees with a SIMPLE IRA plan, also known as a Savings Incentive Match Plan for Employees individual retirement account. Like a 401(k), both employees and employers can contribute to the retirement plan. Employees contribute on pre-tax basis, and employers are eligible for certain tax benefits.

Unlike a 401(k), employers are required to contribute either a match of up to 3% or a 2% nonelective contribution for each eligible employee. However, employers do not have to meet the filing requirements of a traditional 401(k) plan. Another difference from 401(k) plans is that employees cannot opt out of participating in a SIMPLE IRA if they are eligible; they must receive the non-elective company contributions if eligible.

SEP plans

A Simplified Employee Pension (SEP) plan is similar to a SIMPLE IRA but is catered more toward self-employed or small business owners. The most significant difference between a SIMPLE IRA and a SEP is that employees cannot add elective contributions to a SEP plan — only employer contributions are allowed. When using a SEP plan, the employer also has greater flexibility in when and how much to contribute.

Profit-sharing plans (PSPs)

Profit-sharing plans (PSPs) are a special type of retirement account that allows employers to reward qualified employees for positive company performance. When a company offers PSPs, each eligible employee will receive an employer contribution on a quarterly or annual basis. Like SEP plans, these retirement accounts are only designated for employer contributions — employees cannot make additional elective contributions.

Profit-sharing plans can be offered by businesses of any size, and companies can elect to offer a profit-sharing plan even if other retirement account plans are offered to employees. While employers have a lot of flexibility in when and how to make contributions to PSPs, PSP allocations must not discriminate in favor of highly compensated employees.

Employee stock ownership plans (ESOPs)

Instead of cash contributions, employee stock ownership plans (ESOPs) provide a vehicle for companies to reward employees with stock ownership in the company. This form of retirement account can benefit employers by providing an employment incentive that offers tax benefits for the company. The stock ownership also keeps employees focused on building profitability within the company, since they will directly benefit when the company's stock rises.

457 plans

457 plans are very similar to 401(k) plans, but these retirement accounts are typically only offered through governmental employers and not for profit organizations. Additionally, 401(k) plans are qualified retirement plans, meaning they must meet all the reporting guidelines and restrictions of ERISA. On the other hand, 457 plans are typically non-qualified plans and not held to the same standards.

403(b) plans

403(b) plans are also very similar to 401(k) plans, but these retirement plans are only for certain employees of public schools and tax-exempt organizations. Similar to a 401(k) plan, 403(b) plans allow employees to defer some of their salary to individual accounts.

Cash-balance plans

Older employees with high savings goals may appreciate the high contribution limits of a cash-balance pension plan. With cash-balance plans, the employer contributes a set percentage of an employee's salary annually to the account. Employees over age 60 can save over $200,000 annually, as compared to a maximum combined contribution limit (including employer contributions) of $67,500 in 2022 for a 401(k). Cash-balance plans provide a vehicle for older investors to dramatically increase their retirement nest egg on a pre-tax basis.

Non-qualified deferred compensation plans (NQDCs)

Another employer-sponsored retirement vehicle is the non-qualified deferred compensation (NQDC) plan. This plan has some of the most stringent requirements and do not typically involve any addition to an employee's compensation. Instead, the qualifying employee uses the account to defer part of their expected annual compensation to a future tax year. With NQDC plans, the employee must make this optional election before the tax year in which the deferred income will be earned. Once these plan elections are made, they cannot be revoked.

Types of retirement plans not sponsored by employers

While employees may be most familiar with retirement plans sponsored by their employers, there are also a number of retirement plan options that are not sponsored by employers. These plans are particularly useful for individuals who would like to save for retirement but are self-employed, between jobs, or who have reached the contribution limits in employer-sponsored plans and would like to continue investing for retirement.

Non-employer-sponsored plans can be set up through any properly licensed investment broker, so individuals can "shop around" and find plan options that best meet their needs. With employer-sponsored plans, employees are typically limited to the one or two options offered by their employer and have little say in which plans are offered or how the funds are invested. With non-employer-sponsored plans, individuals can maintain much more control over their retirement funds.

Pooled Employer Plans

A Pooled Employer Plan is a multiple-employer plan designed to take many administrative burdens off employers' hands. The Pooled Employer Plan (PEP) allows employers of any size to pool assets into a 401(k) plan administered by a professional Pooled Plan Provider (P3). There are many benefits of a PEP, it’s ideal for businesses who want an easy-to-manage, turnkey 401(k) plan with less cost, simplified administration, and reduced fiduciary risk.

Traditional individual retirement accounts (IRAs)

Traditional IRAs allow individual investors to save for retirement on a pre-tax basis, up to certain contribution limits set by the IRS. Like 401(k) plans, there are some reporting requirements designed to provide transparency to individual investors and ensure that plan funds are being managed in a fiscally responsible way, but the reporting burden is on the shoulders of the financial institutions that manage and offer the IRA plans, not the individual account holders.

If IRA funds are withdrawn before the account owner reaches age 59 ½, they will likely incur penalties, and all funds are taxed when they are withdrawn from the account. This allows investors to save funds for retirement, when they are more likely to be in a lower tax bracket.

Roth IRAs

Roth IRAs are similar to traditional IRAs, but all plan contributions are made on an after-tax basis. Because plan contributions are made with after-tax money, future withdrawals made at retirement age are made on a tax-free basis. Roth IRA contributions are still subject to certain annual contribution limits, and plans are set up through a traditional brokerage or financial advisor.

Payroll deduction IRAs

For investors who like the convenience and accountability of payroll deductions to fund savings strategies, some traditional and Roth IRAs can be set up to be funded on a pre-tax (for traditional IRAs) or post-tax (for Roth IRAs) basis via payroll deduction. The benefits and limitations of these accounts mirror their non-payroll-deduction counterparts, but with the automated contributions deducted directly from a paycheck.

Guaranteed income annuities

Guaranteed income annuities, sometimes simply referred to as income annuities, are a specific retirement savings tool that converts retirement savings into a regular monthly stream of income. Income annuities come in two forms — single premium immediate annuities (SPIAs) or deferred income annuities (DIAs). In both cases, the income annuity accounts are using funds already saved for retirement to "purchase" a regular, guaranteed stream of income, regardless of how the investment markets perform.

Cash-value life insurance plan

Although cash-value life insurance plans are not designated solely as a retirement plan, they can certainly be used for this purpose. With a cash-value life insurance plan, a life insurance policy is purchased on the life of the investor, and the policy also includes a cash-value portion that accrues tax-deferred interest. This can be an attractive retirement savings option, since money grows on a tax-deferred basis and the cash value can typically be accessed for certain life events (such as retirement) while the investor is still alive.

Conclusion

Whether you are looking for retirement savings options for yourself or your employees, there are a number of different plans available to meet a variety of needs. The best plan options will depend on your age, savings goals, the size of your organization, and varying tax needs. The best retirement strategy will involve cooperation with a retirement specialist who can understand your organizations needs and work with you to achieve your goals

An already-concerning U.S. savings crisis has been exacerbated by the addition of a once-in-a-century pandemic, which has upended many people's finances. A lack of emergency funds, lack of long-term savings, layoffs and furloughs, and housing insecurity are just a few challenges that have left Americans struggling to make ends meet — let alone save toward retirement.

The Federal Reserve Bank's 2020 Economic Well Being of U.S. Households report, which was conducted during the COVID-19 pandemic, estimated that one quarter of non-retired adults in America had no retirement savings or pension. While most non-retired adults had some type of retirement savings, only 36% of non-retirees thought their retirement saving was on track.

But putting off saving or not planning for the financial aspect of non-working years compounds with each year that an individual doesn't save. As more workers contend with their ability to save during and after their working years, you may want to consider the advantages of a retirement plan offering at your business.

Why Aren't More Americans Saving for Retirement?

Not saving for retirement often correlates with financial challenges elsewhere in an individual's life. Trouble covering current living expenses today makes it difficult to plan and save for a retirement that could still be decades away. The most recent Retirement Confidence Survey by the Employee Benefit Research Institute echoed these sentiments. The survey found that 44% of respondents were only somewhat confident that they will have enough money to take care of basic expenses during retirement.

A lack of retirement savings may also relate to employees' beliefs on the reality of retiring at all. When we surveyed over 1,000 Americans in 2017 about their feelings toward retirement, their responses revealed a mix of optimism and anxiety about what their post-work years would entail. Some predicted a future of more work: over 45% of respondents said they planned to work part-time once they retire, while more than 1 in 10 anticipated not retiring at all.

Other obstacles that can impede retirement include:

• Longer life expectancy: Americans today are living longer than those in previous generations. The Social Security Administration estimates that a 65-year-old can expect to live another 19 to 21.5 years, on average. A third of 65-year-olds will reach age 90, and 1 in 7 will live beyond age 95. The longer you live, the more money you'll need, even if it's to cover just basic expenses.
• Insufficient Social Security benefits: While retirees currently collect Social Security benefits, there continues to be a looming sentiment that these funds will be cut or run out before individuals will be eligible to begin claiming them.
• Rising health insurance costs: Healthcare premiums have been on the rise for years, and individuals need to prepare for medical costs to increase as they get older. This is why part of sound retirement planning includes accounting for health-related costs. However, the EBRI survey found that just 28% of respondents felt very confident about having enough to take care of medical expenses during their non-working years.
• Lack of access to retirement options: While an employer-sponsored 401(k) plan is a popular employee benefit, not all businesses offer one, especially smaller companies.
• Americans are working until later in life: The average American is putting off retirement and working longer than those in previous generations, either out of necessity or preference. However, factors such as health issues, professional skills gaps, and caretaking for family members can hinder individuals from continuing to work at the same level as they did when they were younger.

Why It's Important That Employees Save and Invest for Retirement

Consistent saving is integral for employees to give themselves the freedom and control over their non-working years. While external factors can add unpredictability into their lives, saving for retirement is something within employees' control. The factors below are important ones to communicate with employees who may either have no retirement funds or are behind on saving.

The Future of Social Security Is Unpredictable

According to the Social Security Administration, its payments replace an average of 40% of a wage earner's income after retiring. And as mentioned above, a question remains as to how long Social Security benefits will be available. Given these factors, the assumption that Social Security benefits will completely fulfill a retiree's financial needs is grossly inaccurate.

Factors in Your Control

In addition to Social Security benefits, account for other related factors such as tax rates, inflation, and government programs such as Medicare, all of which are sure to evolve over time. That's why employees should prioritize retirement savings. Even with variances such as contribution limits, employer matching, and market returns throughout their working years, a consistent plan for saving into a 401(k) or similar plan is completely up to them to take advantage of.

Maintain Independence

Having adequate savings for retirement allows for a certain level of self-sufficiency. Those who don't have enough to afford even the most basic of living expenses — housing, food, etc. — may have no choice but to rely on their kids or family members. While some may enjoy such a setup, others don't envision their retirement years this way. For this reason alone, saving enough for retirement is key to having happy and independent non-working years.

Take Advantage of the Power of Compounding

One of the greatest advantages of retirement plans is the power of compound earnings growth, where you earn interest on the interest you've already earned. And the earlier you start saving (and continue to consistently save), the more of an impact compound interest can have on your total savings. As you can see in the chart below, even a few extra years of saving can make a sizable impact.

Additionally, account for the fact that incrementally increasing 401(k) contributions over time would allow for even more money at retirement.

Ways To Improve Retirement Saving for Your Employees

As an employer, you are in a great position to help your employees plan for retirement and make the most of the plan that you offer. Below are some ways you can encourage them to start saving.

Take Advantage of State-Sponsored Retirement Plans

In an effort to help combat a retirement crisis and meet worker demand for more robust retirement plan options, some state governments have implemented their own programs. For example, Oregon has required that every employed individual in the state have access to a retirement savings plan. To assist employers in meeting this obligation, the state has rolled out OregonSaves, a government-sponsored plan. California and Illinois have also set up similar plans for certain workers who lack access to a retirement savings plan through their employer.

Offer a Retirement Plan as Part of Your Employee Benefits Package

When offered as part of a total benefits package, retirement plans are one way to help employees prepare for their future. Smaller employers can add a basic retirement plan option that can help improve hiring and employee retention. With 401(k) plans in particular, there are many routes you can go when setting up and servicing a plan. Integration with payroll makes servicing and compliance easier than ever. Provisions in the SECURE Act also provide the most significant retirement savings reform legislation in 15 years, offering benefits such as a larger tax credit for employers who set up new retirement plans, longer adoption time, and more.

Since some states now require certain employers to offer a plan, companies will also need to understand and comply with newly enacted laws regarding retirement benefits. In many cases, offering your own plan will meet the state's requirements. Providing access to state-sponsored plans like OregonSaves may be an option, but these state plans give employers less control over plan design and fees.

Making Changes to an Existing 401(k) Plan

Just offering a retirement plan option to employees may not be enough to encourage them to save. Younger staff may not be thinking about retirement and established workers may already feel that they're stretched too thin to save. Employers need to offer plans that will yield tangible benefits and take the time to communicate how a retirement plan can provide long-term financial security. If your current plan hasn't gained traction, it may be time to upgrade to another option. Adding a company match or new investment choices can increase interest in your plan. Or you may want to revamp your plan in its entirety and bring in a new provider. The benefits of switching 401(k) providers may include cost savings for both companies and employees, along with increased participation and better savings results for your staff.

Increasing 401(k) Contribution Limits

If your company does offer a retirement savings plan, communicating the benefits of maximizing contributions is essential. In 2022, employees can contribute up to $20,500 toward their 401(k) plans. Those 50 and older may contribute up to a total of $27,000, which includes an additional $6,500 catch-up contribution. By keeping updated on the latest retirement plan changes and providing updated information to plan participants, employers can help their staff spread their contributions more evenly throughout the year and achieve their annual savings goals.

Encourage Employees to Project Current Savings Into the Future

Taking some time now to assess long-term financial goals can help employees in the long run. They should be asking themselves questions such as:

• How much is currently in my 401(k) account?
• Taking the power of compounding into consideration, what will I have saved by the age I'd like to retire?
• What would happen if I increased retirement contributions by even 1 or 2% each year?
• What do my savings mean for my lifestyle? Will I be able to spend the same amount each month as I currently do?

Using a retirement calculator is a great way to help employees answer these questions and visualize retirement savings. Many employees are disconnected from the power of compound interest, focusing instead on more short-term or immediate financial priorities. But by providing a visual, the inspiration to take advantage of a retirement plan can be powerful. Provide tools and resources to help your employees understand how much they are currently saving and give them an idea of how that breaks down into monthly expenditures.

Fighting the Retirement Savings Crisis in America

Employers play a crucial role in helping U.S. workers save toward a dignified retirement, particularly as a savings crisis continues to loom throughout the U.S. Company-sponsored defined contribution plans like a 401(k) are not only an essential part of achieving this goal, but they are also a key benefit that many potential employees look for when considering whether to join a company. If you'd like to review your current offerings or add a new plan to your benefits package, consider retirement plan services available on the market today.