Do we actually need a National 401(k) Day? Actually, it might be more necessary than you think.
- According to the Bureau of Labor Statistics (BLS), 66% of private industry workers had access to a defined contribution plan, like a 401(k), as of March 2022.
- That data also shows participation in 401(k) plans is shockingly low, with only 56% of all workers participating.
- At the same time, employees’ retirement confidence is lower than ever. 4 in 10 workers report serious concerns about how inflation will impact their spending power in retirement.
Something doesn’t add up. And this disconnect is the reason behind National 401(k) Day.
What is National 401(k) Day?
The Profit Sharing Council of America (PSCA) first launched National 401(k) Day in 1996. Known today as the Plan Sponsor Council of America, PSCA is the leading association for defined contribution plan sponsors in the United States.
National 401(k) Day is celebrated the Friday after Labor Day. In 2023, that’s September 8th. The main objectives are to:
- Help Americans better understand their retirement plan
- Promote retirement savings participation
- Encourage companies to educate employees in simple ways
Retirement planning is complex and things are always changing. So, the more informed and active we are about retirement saving, the better.
If you’re an employer, you can hold a lunch ‘n learn session to provide resources for employees. Hold open office hours and offer examples of questions they could be asking. If you’re an individual planning for retirement, take this chance to boost your financial education. And tell your boss you want 401(k) employee education.
Read on for FAQs about 401(k)s, plus five tips to grow your retirement faster.
Why 401(k)s are Great for Retirement Savings
What’s so great about 401(k)s in the first place? These retirement savings plans are connected to your employer. And if you’re lucky enough to have a 401(k), they make it easy to save early and often for retirement.
Here’s why you should contribute regularly to your plan:
Convenience - Being employer-sponsored makes your 401(k) really easy to manage. You set the amount you want to put toward retirement, and contributions are automatically diverted from your paycheck.
Compounding - When you start early, your money is supercharged by compounding. This "interest on interest" is calculated on both the initial principal and the accumulated interest from previous periods.
Employer match - If your employer matches a portion of your contribution usually, you’re getting extra retirement savings for free. The most common employer match is 50 cents for every dollar of up to 6% of your salary.
Tax benefits - If you make pretax contributions, you won’t need to pay income taxes on the money you put into the 401(k). And it grows tax-free until you withdraw the funds in retirement.
401(k) FAQs
How Much Can I Contribute Annually?
Each year, the IRS sets the maximum annual contribution. For tax year 2023, the 401(k) contribution maximum is $22,500 for individuals under 50 years old. If you’re aged 50 or older, you can make an additional catch-up contribution up to $7,500.
What Does Vested Mean?
The funds your employer contributes in to your 401(k) may be on a vesting schedule. Vesting refers to the time it takes for you to own or have access to the money they’ve put into your account. Ask your Benefits Administrator or HR Department what the vesting schedule is for your company.
What if My Employer Doesn’t Offer a 401(k)?
You have options! One of the easiest is an Individual Retirement Account (IRA). You can open with almost any financial institution and there’s very little paperwork involved. For 2023, the combined contribution limit to both traditional and Roth IRAs is $6,500 for individuals under 50 years old or $7,500 for those who are 50 or older.
If you’re self-employed, you have five main retirement plan options:
- Solo 401k
- SIMPLE IRA
- SEP IRA
- Traditional or Roth IRA
- Defined benefit aka pension plan
5 Tips to Make the Most of Your 401(k)
1. Start Early
It’s never too late to start saving for retirement but the best time to start is always right now. If you’re in a job that offers a 401(k), start taking advantage today! If not, open an IRA. It’s super easy to do and your future self will thank you. And if someone you love is young and maybe starting their career, help them start saving today through a 401(k) or IRA.
2. Take Advantage of Matching Contributions
In the employer match example above, your boss contributes 50 cents per dollar up to 6%. If you contribute 6% in to your 401(k) account, they will contribute 3%. So if you make $100,000 per year, 6% of your salary is $6,000. If you contribute that much to your 401(k), your employer contributes $3,000 – of free money – as a match. Need we say more?
3. Select the Right Investments For You
While you can’t typically invest in individual companies through a 401(k), you can choose one or more mutual funds or exchange-traded funds (ETFs). From there, you can choose investments based on things like your risk tolerance and other investment preferences.
4. Avoid Early Withdrawals
Like other retirement accounts, taking money out of your 401(k) before age 59 ½ is considered an early withdrawal. Early withdrawals have long-term consequences, like depleting your retirement savings and incurring a substantial tax bill. They count as taxable income and come with a 10% penalty on the amount withdrawn.
5. Schedule Plan Check-ins
Long-term investments are easy to forget about, but you should monitor as you go in order to make adjustments as needed. Review your investments at least once a year. And when you change jobs, don’t leave your 401(k) behind! We recommend rolling your 401(k) over to an IRA.
And here’s how to find out if you have lost 401(k)s.
More than just an excuse for financial brands to post on social media, 401(k) day is the perfect chance for you to revisit your retirement plan to see if you’re on the right track.
Read more about your options for retirement savings here.
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