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Understanding Betterment for Business 401(k) Accounts

A 401(k) plan is an employer-sponsored retirement savings plan that allows you to save on a tax-advantaged basis. This guide is intended for participants in Betterment for Business 401(k) plans.

Articles by Betterment Editors
By the Editorial Staff Betterment Resource Center Published Sep. 01, 2018
Published Sep. 01, 2018
11 min read

TABLE OF CONTENTS

Overview

Contributions

Withdrawals


This guide is intended for participants in Betterment for Business 401(k) plans. The information in this guide is provided by Betterment LLC, an SEC registered investment advisor.

Overview

What is a 401(k) plan?

A 401(k) plan is an employer-sponsored retirement savings plan that allows you to save on a tax-advantaged basis. There are two types of 401(k) contributions: Traditional and Roth. 

Traditional contributions allow you to save pre-tax income from your paycheck, meaning income taxes are not withheld on these amounts today but will be taken when you withdraw the funds in the future. 

Roth contributions are a way to save after paying income taxes (no deduction today), but your withdrawal upon retirement is not subject to income taxes. Some employers may choose to match their employees’ deferral contributions, helping them to grow their retirement savings further.

How is Betterment for Business different from other 401(k) plans?

With other 401(k)s, generally participants are asked to choose between a selection of funds—often with minimal insight or advice regarding their fees, track record, or how to allocate across funds. 

In contrast, Betterment for Business provides a 401(k) that includes personalized investment advice. This advice is designed to help you meet your retirement goals by accounting for your full financial picture, including current and expected income, cost of living, net worth, and external accounts (including those of your spouse or household). 

Learn more about our retirement planning tool, which takes a holistic view of your financial life and doesn’t just consider your 401(k) contributions when giving you advice.

My company just announced that we are switching to a Betterment 401(k) – what do I do now?

Welcome to a better 401(k)!

When your employer switches to a Betterment 401(k), participants go through a conversion process.  During this process, the funds that you held at your previous 401(k) will be sold and transferred to cash in order to move them over to Betterment and into your new investment portfolio. 

A conversion triggers a “blackout” period, during which you will not have access to your funds. You cannot change investment elections, contribute to, or withdraw from your 401(k) at your prior provider for a short period while your money is transferred to Betterment and deposited to your account.

30 to 90 days before you are eligible to join the new plan, you will receive a custom email with a link that sends you to the Betterment site. You can create your account, change your savings elections, and adjust your investment portfolio.

The amount you’ve elected to save will be deducted from your paycheck and transferred into your Betterment 401(k) account each pay cycle.

What is automatic enrollment?

If your plan has automatic enrollment, your employer is setting your default savings rate in case you don’t take action to save in your 401(k) plan. These automatically saved amounts will be invested in an age-appropriate portfolio based on your expected timeframe to retirement. You can log in to your account to change both your savings rate—including choosing not to participate in the plan—and investment selections at any time.

Often times, plans with automatic enrollment have higher participation rates. Many employers are now choosing this option so that they can help more employees get the ball rolling on saving for retirement while still giving you full flexibility to pick the right rate for you.

Does Betterment provide participant support?

Yes. Betterment offers a dedicated Customer Success team which can be reached at support@betterment.com or +1 855-906-5281.

Customer Success hours are:

Monday – Friday: 9:00 AM – 6:00 PM ET

What are the fees associated with my Betterment for Business 401(k) account?

Any administrative or investment management fees charged to your account are described in your annual fee disclosure (available in your account statements), and are transparently reported on your statements. 

The ETFs that we use in our core portfolios have expense ratios that on average range between 0.06% to 0.17% for your total portfolio, depending on your allocation. One of the reasons that we are able to keep costs low is because we choose the same, low-cost, passive ETFs to use in all of our portfolios. We don’t select or offer any proprietary funds like some mutual fund companies, so there isn’t the incentive or ability to “pass” admin fees through proprietary fund fees. We also don’t pass through trading or rebalancing fees that result from us investing on your behalf.

Why does Betterment use ETFs instead of mutual funds like most 401(k) plans?

The 401(k) market is largely dominated by insurance and investment companies who are incentivized to offer certain mutual funds. Often, they are compensated in some way by the mutual fund company, which usually comes in the form of revenue-sharing arrangements.

ETFs, on the other hand, generally cannot have the same revenue-sharing relationships that many mutual funds do. That means the 401(k) providers who use ETFs aren’t being compensated behind closed doors, so they have to charge explicit fees for their services. This helps make it easier for plan sponsors to evaluate, compare, and understand the true costs of administration. And it allows participants to see where their money is going.

In addition to having lower fees, ETFs provide more liquidity, are more tax-efficient, and rely on passive investing rather than active investing—which tends to get better results.

Learn more about the differences between ETFs and mutual funds.

Contributions

What is the difference between Traditional 401(k) contributions and Roth 401(k) contributions?

In the most basic sense, the difference is that Roth 401(k)s are comprised of after-tax dollars while Traditional 401(k)s are comprised of before-tax dollars. Traditional 401(k) contributions are withheld tax-free, whereas Roth contributions will be counted as taxable income for the year during which the money is deferred. The benefit of Roth contributions comes into play when the 401(k) contributions and income are liquidated.

Roth 401(k) contributions and earnings are exempt from federal taxes as long as the money is distributed at least five years after the participant’s first Roth contribution is made, and occurs on or after the date that the participant turns 59 ½, following the participant’s death, or is initiated by the participant due to disability.

Is there a limit to how much I can contribute to my 401(k) account?

For 2020, you can contribute up to $19,500 if you are under 50. If you are age 50 or older, you can contribute an additional $6,500, for a total of $26,000.

Limits are subject to change each year, so check for the latest IRS guidelines.

How do I change the amount of my paycheck, or deferral, that I contribute to my 401(k)?

To change the amount that you contribute to your 401(k), simply log in to your Betterment 401(k) account, click Transfers, choose Pending Transfers, and then select “Edit contribution rate”.

You can either choose a $ (fixed dollar) deferral amount or a % (percentage) of your paycheck.

 It takes one to two payroll cycles for your new rate to be effective.

As you may know, many plans allow you to make two types of contributions to your 401(k) – Traditional and Roth. Although Betterment takes both your Roth and Traditional contributions into account when helping you prepare for retirement, they are independent from each other in your Betterment dashboard, so make sure to modify your contribution rate for each separately.

How do I know what my employer has contributed to my account?

Employer contributions come in several flavors, whether a match (based on how much you’ve elected to save in the plan) or a non-elective / profit sharing contribution (typically based on a percentage of your income for the year, regardless of how much you saved). 

When your employer makes these kinds of contributions, you’ll see the breakdown in your contribution confirmation email.

How can I roll funds into my 401(k) account?

Rolling over other accounts to your 401(k) at Betterment is easy, and takes just a few steps:

  1. Download Betterment’s 401(k) Rollover Form.
  2. Obtain and complete distribution paperwork from your prior provider to request a rollover. The payment and mailing instructions are included in the Betterment Rollover Form above.
  3. Complete the Betterment 401(k) Rollover Form and return it to us via email at 401krollover@betterment.com. Note that we must receive the form within 5 days of receiving your rollover check to deposit it. 
  4. Request your rollover check payable to: Betterment Securities FBO [Your Name] Mail to either of the following addresses:
    If regular mail:

    Betterment 401(k)

    PO Box 208435

    Dallas, TX 75320-8435

    If overnighting by special courier:

    Lockbox Services 208435

    (include above in Reference Section)

    Betterment 401(k)

    2975 Regent Blvd, Suite 100

    Irving, TX 75063

What does ‘vesting’ mean and how does it apply to my account?

In short, vesting applies to how much of your 401(k) balance you own or can take with you (roll over or cash out) when you leave your employer. 

You always have full ownership of all of the funds that you have directly saved or rolled into a 401(k) plan. Your employer’s matching or profit-sharing contributions, on the other hand, might be subject to a vesting schedule that dictates how long you have to work at a company until you have full rights to these contributions. 

If you leave your current employer before you are fully vested, you only have ownership rights over your deferral contributions as well as the portion of your employer match contribution that has vested. Vesting schedules vary by employer and plan, so you should check your Summary Plan Description (SPD) for your plan’s specific schedule.

Withdrawals

How and when can I withdraw from my 401(k) account?

As a general rule, 401(k) savings are not eligible for withdrawal before the participant turns 59 ½, leaves employment, becomes disabled, or passes away. When funds are available to a participant before age 59 ½, it often comes with a 10% early withdrawal penalty for accessing the funds prior to retirement.

Your Summary Plan Description (SPD) can provide more information on what types of withdrawals your plan allows, and you can see more information about distributions you may be eligible for by selecting your 401(k) account in the withdrawal menu.

What happens if I leave my employer?

If you leave your current employer, you have several options for your Betterment 401(k) account. You may be able to leave your account with your former employer’s plan until you reach retirement age. If you have a lower account balance, you may need to decide sooner where you want benefits sent. 

You also have the opportunity to roll over your benefit to a new employer’s retirement plan or to your own IRA account. You can also opt to cash out all or a portion of your account, but should review the tax impact and penalties you may incur if under age 59 ½. You can contact our Customer Success team at rollovers@betterment.com to learn more.

Generally, participants who choose to take their termination distribution as a cash distribution are subject to a 20% federal income tax withholding and any applicable state income tax withholding, which may or may not cover the tax bill (your income taxes related to this withdrawal) and any applicable early withdrawal penalties.

Betterment is not a tax advisor; consider consulting a tax advisor about your specific situation.

What is an in-service distribution?

Some 401(k) plans allow you to take a withdrawal from your account while employed for any reason, often beginning at age 59 ½. This in-service distribution can be rolled over to an IRA or another qualified plan, or cashed out. Participants may opt to use this distribution type to cover a current need, or diversify the tax and investment options they’re looking to use.

Your Summary Plan Description (SPD) can provide more information on what types of withdrawals your plan allows, and you can see more information about distributions you may be eligible for by selecting your 401(k) account in the withdrawal menu here

It is important to consult IRS guidelines or a financial professional prior to initiating an in-service distribution.

What is a required minimum distribution?

Generally speaking, there is a required minimum distribution (RMD) that the IRS requires participants take from Traditional retirement plans beginning for the year in which they retire or turn a certain age.

In the event that you don’t take your required minimum distribution, you may be subject to a 50% excise tax on the amount of the distribution that you failed to take on time.

To determine your deadline for taking a required minimum distribution, please refer to IRS guidelines or speak to a tax professional.

What is a hardship withdrawal?

As noted above, amounts you contributed to a 401(k) plan are typically not accessible until you terminate employment, reach age 59 ½, or become disabled. However, the IRS permits your employer to allow for one added type of distribution while you are employed for a severe and immediate need (typically falling within a very specific list of situations). If taken, these distributions may still be subject to early withdrawal penalties, are not eligible for rollover, and cannot be repaid to the plan.

The withdrawal itself must be limited to the amount needed (may be adjusted to include taxes and penalties).

Your Summary Plan Description (SPD) can provide more information on what types of withdrawals your plan allows, and you can see more information about distributions you may be eligible for by selecting your 401(k) account in the withdrawal menu here

It is important to consult IRS guidelines or a financial professional regarding early distributions.

Can I take out a loan on my 401(k) account?

Some 401(k) plans allow you to borrow against your 401(k) to meet your financial needs, in exchange for a promise to repay the borrowed amount (often through payroll deductions) to your account. If you apply for a loan, it must meet the terms set out in your plan’s loan policy. Typical terms include a maximum loan of up to 50% of your vested account balance (capped at $50,000 and further restricted by loans you had in the last 12 months), and repayment within 5 years. The interest rate set for your loan will be interest that you pay back to your own account (not to a financial institution). 

It’s important to note that plans often require full repayment of the loan upon termination of employment, so if you think a job change may be in your future, consider whether you’ll be able to repay the loan out of pocket or plan for the tax bill due if you cannot.  

While many plans allow participants to take out a loan on their account, it is important to remember that 401(k) plans are designed to help ensure that you have enough money set aside for retirement.

Your Summary Plan Description (SPD) can provide more information on what types of withdrawals your plan allows, and you can see more information about loans you may be eligible for by selecting your 401(k) account in the withdrawal menu here.

What’s a QDRO?

QDRO stands for Qualified Domestic Relations Order. According to the Department of Labor, a QDRO recognizes a spouse’s, former spouse’s, child’s or dependent’s right to receive benefits from a participant’s retirement plan. A domestic relations order is a document typically approved by a court judge stating how an account must be split or reassigned, and is required to begin the QDRO process.

Please contact your employer to find out more about the process of reassigning part or all of your benefit with a court order.

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