What is a 401(k)?
We’re sure you already know what a 401(k) is, but just for good measure, we’ll sum it up:
A 401(k) plan is an employer-sponsored program that enables employees to save for retirement. Funds contributed to the plan by employees reduce their total taxable income (similar to the way healthcare deductions reduces employees’ gross income). Employee contributions to the plan can be automatically deducted from payroll on a regular basis or a few times a year. 401(k) plans are governed by the Tax Code and regulations that incentivize employees to maintain the funds untouched until retirement. It is important to remember that the balances in 401(k) plans are impacted by the overall contribution of the employee and the employer (in case of matching contributions), as well as investment performance of the funds.
Why it is so important to maintain a healthy 401(k) plan to support employee financial wellness?
With regular contributions to a 401(k) plan, employees can consistently and responsibly save for their retirement, while still having enough take-home pay each pay period to cover day-to-day expenses. Unlike other savings accounts that can be for a specific purpose or term, the purpose of a 401(k) is to create and build employees’ retirement incomes. For many employees, 401(k) plans are the only investment account they will have, and almost the only source of income when they are no longer part of the workforce.
How can I help employees preserve their retirement funds?
When financial hardships arise, 401(k) plans are often the first place employees will turn to plug the gap. For many, this is because their retirement funds are their only form of savings. For others, this is because of the misconception that ‘borrowing from themselves’ is preferential to the other credit options available to them.
However, taking any amount out of retirement funds could mean a significant adverse effect to the investment’s growth potential, costing employees dearly in the long run.
Employees often don’t realize the terrible consequences that not investing in or taking away from retirement funds can have. It will take an employee with average income years to repay even just a few thousand dollars, especially if, like most Americans, your employees are not contributing the maximum amount into their 401(k) plans.
The good news is that employers can offer employees an alternative to borrowing from retirement plans. Financial wellness benefits like Kashable, that offer reliable, affordable credit when hardships strike, give employees the chance to handle financial burdens without a knock-on effect to their retirement plans.
Learn more about how Kashable can help when you Book a Demo.