National 401(k) Day

Started by the Profit Sharing/401(k) Council of America (PSCA), now known as the Plan Sponsor Council of America, National 401(k) Day is a holiday dedicated to promoting retirement savings education. It's a day for sponsors of 401(k) plans to provide information and communication to those participating in their plans and to let participants know the importance of saving for retirement and how to do it. It takes place on the Friday after Labor Day, with the idea that "you start the week with Labor Day and end the week with Retirement." The PSCA provides 401(k) materials year-round—not just on National 401(k) Day—that sponsors of plans may use with their employees.

A 401(k), which takes its name from the Internal Revenue Code that describes it, is a savings account that is funded by pre-tax payroll deductions. The funds can be invested in various stocks, bonds, mutual funds, and other assets, and they are not taxed on capital gains, interest, or dividends until they are withdrawn. 401(k)s were created to be supplements for regular pensions, but have since replaced pensions as the main form of retirement savings. The maximum amount that an individual can contribute to their 401(k) depends on their plan and salary, as well as government guidelines. The government sets the limit on the highest amount that can be placed into a 401(k). As of 2019, up to $19,000 can be deferred tax-free into a 401(k). Those over 50 can defer an additional $6,000.

The groundwork for 401(k)s was set with the Revenue Act of 1978. Going into effect on January 1, 1980, it had a provision that allowed tax-deferred compensation for bonuses and stock options. 401(k)s were created the following year, allowing tax-deferred salary deductions for the first time.

There are a few advantages of 401(k)s and reasons why people use them. As previously mentioned, dividends, interest, and capital gains aren't taxed until they are disbursed; they are allowed to compound tax-free while they are in the account. Many 401(k)s have employer match programs, where employers match a certain percentage of an employee's contribution to their 401(k). Another advantage of 401(k)s is there is a lot of flexibility as to how they can be invested, and employees can customize the investment of their assets to their liking.

An additional advantage that 401(k)s have is their portability. This refers to their ability to often follow an employee throughout their career, regardless if they switch employers multiple times. If an employee has a 401(k) and moves to a new job, they can often leave their assets in their current plan, complete a 401(k) rollover into their new employer's 401(k) plan, or complete a rollover into an individual retirement account (IRA). However, if they cash out their plan, taxes must be paid as well as a 10% penalty fee—this is not financially smart in the long run.

Lastly, both loan and hardship withdrawals are possible with 401(k)s. With a loan, an employee can use funds from their 401(k) without cashing it out. As long as there isn't a default, 401(k) loans aren't subject to taxes or the 10% penalty that would otherwise occur. Loans are usually limited to 50% of the balance or up to $50,000 and must be paid back within five years, unless the loan is taken out for a home. But, interest does need to be paid on the loan, even though the borrowing is being done from oneself. Not all employers offer 401(k) loans, but often offer something called a hardship withdrawal if certain criteria are met.

How to Observe National 401(k) Day

If you are an employer that sponsors 401(k)s for your employees, you should use the day to provide information for your employees about their plans. The PSCA has provided some materials that employer sponsors can use with their employees as well. If you are an employee with a 401(k), today is an excellent day to review it. This is also a great day to learn more about 401(k)s in general.

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