A traditional 401(k) plan is now the predominate form of retirement benefit provided by employers. However, companies tweak their retirement benefit packages from year to year and sometimes add new 401(k) features or other types of retirement benefits. Here’s a look at the types of retirement benefits that are increasingly being offered to employees.
Roth 401(k). A Roth 401(k) allows employees to save after-tax dollars in order to qualify for tax-free withdrawals in retirement. About half of employers now provide a Roth 401(k), up from a third in 2012, according to a Society for Human Resource Management membership survey of 3,490 human resources professionals. However, not all employers will match contributions to the Roth 401(k). SHRM found that just 37 percent of the companies surveyed provide a 401(k) match on Roth account contributions, compared to 74 percent that match traditional 401(k) deposits.
When a Roth 401(k) match is provided, employers are required to put the matching funds in a traditional 401(k) account, and withdrawals will be taxable in retirement. “If you are saving on an after-tax Roth basis, your match is going to go in pretax, so you are going to be getting tax diversification,” says Marina Edwards, a senior consultant for Willis Towers Watson’s retirement practice. Having retirement investments subject to two different tax treatments will give you options to control your tax bill in retirement. “If you have a bucket of money that is after-tax that you can pull from, if you are an individual who is close to exceeding a tax bracket, by taking 401(k) distributions from a tax-free source, you stay in that lower tax bracket,” Edwards says.
Roth 401(k) plan conversions. Employers are increasingly allowing workers to convert their traditional 401(k) assets to a Roth within the 401(k) plan. Nearly a third (32 percent) of plans now permit Roth conversions, up from 19 percent in 2012, SHRM found. When you transfer money from a traditional tax-deferred 401(k) to an after-tax Roth 401(k) you have to pay income tax at your current rate on the amount converted. Some financial planners recommended executing a conversation in a year when you have an usually low income in order to pay a lower tax rate, or you could convert a small amount each year over several years to keep the tax bill manageable. “If your plan doesn’t have the conversion feature, ask for it through human resources,” Edwards says. “When they hear that the participants are asking for it, that’s when they add it.”
Retirement advice. Some 45 percent of employers provide advice about preparing for retirement, up from 39 percent in 2012, according to the SHRM survey. A financial advisor might offer education or recommendations about retirement planning and other major life goals. Companies might also provide online, one-on-one or group investment advice. “Your aim should be to get a good understanding of what he or she will do for you, what the benefit and cost will be and whether you trust the advisor to do what is in your best interest,” says Ted Halpern, founder of Halpern Financial in Ashburn, Virginia. “A fiduciary puts the client’s best interest before their own.”
Phased retirement programs. A phased retirement program allows you to gradually reduce your schedule or responsibilities as you approach retirement. Most companies that allow phased retirement do so as an informal arrangement negotiated by individual employees. The proportion of employers allowing informal phased retirements has doubled over the past five years to 11 percent. A phased retirement often makes it easier for workers to transition into retirement. “It gives you time to explore what you are going to do next,” says Teri Alexander, a certified financial planner for Alexander Financial Planning in Columbus, Ohio. “Then you are much more ready to retire and it doesn’t feel like such a jolt.” Employers also benefit when older workers mentor younger colleagues and pass along valuable institutional knowledge.
However, employers also decided to cut some retirement benefits. Fewer organizations are allowing catch-up contributions to 401(k) plans for workers age 50 or older, SHRM found. Some employers have stopped allowing employees to tap into their retirement accounts early via loans or hardship withdrawals. The proportion of employers providing retiree health care coverage has also declined from 24 percent in 2012 to 20 percent in 2016.
Emily Brandon is the author of “Pensionless: The 10-Step Solution for a Stress-Free Retirement.”