If an employer does not offer a 401(k), there are other investment options, including the traditional IRA and the Roth IRA
Today, when it comes to providing a retirement plan for their employees, businesses large and small, have opted for a defined-contribution plan with choices that include a 401(k), IRAs and Roth IRAs; this, versus a ‘defined benefit,’ program, or more commonly referred to as a pension plan.
According to an interview on CNBC with the CEO of a major investment firm, the era of pension plans represented an almost “paternalistic” approach of making sure their workers would have a financially secure retirement.
But with the introduction of the 401(k) retirement plans back in 1980, employees have been able to squirrel away pre-tax dollars, as well as any employer contributions, in a number of funds through the sponsoring investment firm of the employer’s choosing.
Consequently, this retirement alternative has allowed employers to avoid the risks long associated with years of funding the traditional pension plan, a risk derived from the fact that Americans are simply living longer.
As investors scramble to improve their portfolios since the 2008 economic debacle, their investment decisions are impacted by their increased longevity. Not only are 6,000 of us turning 65 every day, but 13 percent are over the age of 65. What’s more, the average life expectancy for men is 78, and 80 for women.
Does the ‘law’ require employers to provide workers with a 401(k) ?
Employers are not legally bound to provide a sponsored 401(k). For workers fortunate enough to have this choice, they’ve come to realize that their plan was never meant to be the single source of income in their retirement years. Indeed, this self-funded retirement program is meant to complement the retiree’s Social Security and personal savings.
Just how much can they put into their plan? For 2015 an investor’s contribution limit is $18,000; that’s up from $17,500 in 2013 and 2014.
What are the ‘risks’ for employees?
Because the 401(k) is a voluntary program offered by employers, business owners have also managed to detach themselves from being accountable when it comes to fund management, or even educating employees about the basics of investing.
Alternatives to the 401(k).
If an employer does not offer this tax-deferred retirement option, the IRS says it’s okay to put money aside in other investment vehicles, including the traditional IRA and the Roth IRA.
IRA: Workers can turn to the individual retirement account (IRA) for tax-deferred investing; again, like the 401(k), the investments are not taxed until they are withdrawn, but contribution limits are more restrictive than with the 401(k): $5,500 with a $1000 ‘catch up’ if you’re over 50.
Like the 401(k), investors are allowed to take an upfront deduction, thereby reducing the amount of their wages that are subject to taxation.
Roth IRA: No upfront-deductions are allowed like they are with the 401(k) and IRA, but the distributions are tax-free. Also, although there are certain income restrictions before the plan can be allowed by the IRS, the contribution amounts are the same as the IRA.
Both the IRA and Roth IRA require investors to establish their plans through an investment firm, like a Vanguard or Fidelity, for example, who act as the legal custodian of the funds.
American Society of Pension Professionals and Actuaries: “The system is not perfect.”
“Nothing in the history of this country has promoted more savings by average Americans than the 401(k) plan, with total assets in excess of $4 trillion (plus over $5 trillion in IRAs, much of which is from 401(k) rollovers). Three-quarters of American families became investors first through their workplace retirement plan. It is hard to imagine where we would be without our nation’s private retirement system. The system is not perfect…” Forbes 4/24/2013
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