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.
TABLE OF CONTENTS
- What is a 401(k) plan?
- How is Betterment for Business different from a traditional 401(k) plan?
- My company just announced that we are switching to a Betterment 401(k) – what do I do now?
- What is automatic enrollment?
- Does Betterment provide participant support?
- What are the fees associated with my Betterment for Business 401(k) account?
- Why does Betterment use ETFs instead of mutual funds like most 401(k) plans?
- Is the money in my 401(k) account vested?
- What is the difference between Traditional 401(k) contributions and Roth 401(k) contributions?
- How do I change the amount of my paycheck, or deferral, that I contribute to my 401(k)?
- What are “catch-up” contributions?
- What happens if I leave my employer?
- How can I take a termination distribution from my Betterment sponsored 401(k) plan?
- How and when can I withdraw from my 401(k) account?
- What is an in-service distribution?
- What is a required minimum distribution?
- What is a hardship withdrawal?
- Can I take out a loan on my 401(k) account?
- What’s a QDRO?
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.
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 defer pre-tax income from your paycheck. Roth contributions defer income post-tax, but your withdrawal upon retirement is not subject to income taxes. Some employers may choose to match their employees’ deferral contributions, helping them grow their retirement savings further.
How is Betterment for Business different from a traditional 401(k) plan?
With traditional 401(k)s, generally participants are asked to choose between a selection of funds, often with minimal insight into 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 holistic, and is designed to help you meet your retirement goals by accounting for your full financial picture, including cost of living, net worth, spousal assets, income, and external accounts. 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 what’s called 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 – essentially you cannot contribute to or withdraw from your 401(k), and you may lose access to your participant dashboard with your previous 401(k). Best practice is to download all your statements as soon as you know that you are converting to a new 401(k) vendor. Your assets will show up in your Betterment 401(k) account in 4-8 weeks.
30-90 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 to onboard to your 401(k). You can create your account, change your deferral elections and adjust your investment portfolio. Here is a comprehensive guide to help you get started.
The amount you’ve elected to defer will automatically transfer into your Betterment 401(k) account each pay date.
What is automatic enrollment?
If your plan has automatic enrollment, your employer is automatically initiating your deferral contributions into your 401(k). These funds will automatically be invested in an age-appropriate portfolio based on your years to retirement. You can log into your account to change both your deferral election, 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 to save for retirement. A key benefit of automatic enrollment for participants is that it pushes you to begin saving for retirement earlier, as opposed to waiting for you to eventually opt in when you get around to doing so.
Does Betterment provide participant support?
Yes. Betterment offers a dedicated Customer Success team which can be reached at email@example.com or +1 855-906-5281.
Customer Success hours are:
Monday – Friday: 9:00 AM – 6:00 PM ET
Saturday – Sunday: 11:00 AM – 6:00 PM ET (email only)
You can always refer back to the Getting Started Guide.
What are the fees associated with my Betterment for Business 401(k) account?
Fees range from 0.1% to 0.6%, depending on the size of your company’s overall 401(k) plan, and whether your employer opted to pay for a portion of the fee. The underlying ETFs that we use have expense ratios of .1% – .12% on average, so the net expense is generally .2% – .72%. As a basis for comparison, here’s an interesting chart with what 401(k) plans pay on average according to Brightscope. One of the reasons that Betterment LLC is 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 Betterment LLC 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 players who are incentivized to offer certain mutual funds. For example, fund families providing 401(k) services and the distributors who sell the plans may have a conflict of interest. Often, one or more of these parties is compensated in some way by the mutual fund company(ies) that the sponsor selects (with the investment advisor’s help). Compensation often comes in the form of revenue-sharing arrangements, including:
- 12(b)-1 fees: annual distribution or marketing fee (i.e., the salesperson’s cut)
- Sub Transfer Agent (Sub-TA) fees: the fee for maintaining records of a mutual fund’s shareholders
- Soft dollar “excess commissions”: how mutual fund companies pay their service providers; “soft dollar” means they’re paying in the form of giving them business, rather than actual cash
These are all included in the fund’s expense ratio, which is the fee that all funds charge their participants. ETFs, on the other hand, cannot have the same revenue-sharing relationships that many mutual funds do. That means the 401(k) players 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 true costs of administration. And it allows participants to see where their money is going.
Is the money in my 401(k) account vested?
Legally, you have full ownership of all of the funds that you have contributed to your 401(k) account. That said, your employer’s matching or profit-sharing contributions might be subject to a vesting schedule that dictates how long an employee has to work at a company until they have full rights to these contributions. If you leave your current employer before you are fully vested, you only have full 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 with your benefits administrator for your plan’s specific schedule.
What is the difference between Traditional 401(k) contributions and Roth 401(k) contributions?
In the most basic sense, the difference is that the Roth is after-tax dollars while the traditional 401(k) is 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 federal tax exempt 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 59.5, 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?
Yes, as of 2018, the limit is $18,500. If you’re over 50, you can contribute an additional $6,000 for a total of $24,500. This is subject to change, so check here 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 contributed to your 401(k), simply log into your Betterment 401(k) account, click here and select “Edit contribution rate”. You can either choose a $ (fixed dollar) deferral amount or a % (percentage) of your paycheck.
As you may know, many plans allow you to make two types of contributions to your 401(k) – Traditional and Roth. See details here. 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. It takes approximately one payroll cycle for your new rate to be effective.
What are “catch-up” contributions?
Participants in employer-sponsored retirement plans over the age of 50 may make additional contributions above and beyond the normal contribution limit. For 2018, catch-up contributions are allowed up to $6,000.
How “catch-up” contributions are defined is subject to change, so check here for the latest IRS guidelines.
What happens if I leave my employer?
If you leave your current employer, you have a choices as far as what you can do with your accrued 401(k) benefit. One choice is to leave your 401(k) assets in your account with your former employer. Another option is to roll over your deferred contributions as well as vested employer match contributions into your new employer’s 401(k) plan or an IRA. You can contact our Customer Success team at firstname.lastname@example.org to learn more.
How can I take a termination distribution from my Betterment sponsored 401(k) plan?
If you terminate employment with your company, you may take a termination distribution. This is a withdrawal of your funds from your 401(k) account that you can roll to an IRA (at Betterment or elsewhere), to another employer’s 401(k) plan, or take as a cash distribution.
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.
Please contact your plan administrator for more information about your employer’s process for administering termination distributions. Betterment is not a tax advisor. Consult a tax advisor about your specific situation.
How and when can I withdraw from my 401(k) account?
As a general rule, 401(k) funds are not eligible for distribution or withdrawal without penalty before the participant turns 59.5, after retirement. Typically, the only circumstances under which the participant or his/her beneficiaries may be granted access to these funds without penalty are participant hardship/disability, death, or termination of employment – see your plan’s documents for details.
What is an in-service distribution?
When you are 59 ½, some 401(k) plans allow you to take an in-service distribution, which is a distribution from your current employer’s 401(k) plan that you can roll into an IRA. Generally, participants may take an in-service distribution in order to invest the assets in different funds, or broaden the beneficiary options of the account.
Please contact your plan administrator to see if your 401(k) plan offers in-service distributions, and your employer’s process for administering this distribution. It is important to consult IRS guidelines and/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 that the IRS requires participants take from a retirement plan starting April 1 of the calendar year after which they retire or turn 70 ½. In the event that you don’t take your required minimum distribution, you might be forced to pay a 50% excise tax on the amount of the distribution that you failed to take.
What is a hardship withdrawal?
Typically, you cannot take a distribution from your 401(k) plan without penalty, however, some 401(k) plans offer an exception in the event of an immediate and heavy financial need. In general, a hardship withdrawal can be taken only after exhausting all other external and in-plan options including loans and in-service distributions, and cannot be paid back to the plan.
The withdrawal itself must be limited to the size of the need (including taxes and 10% penalties), and the IRS has identified qualified expenses for the employee, the employee’s spouse, dependents or beneficiaries:
- Qualified medical expenses
- Costs related to purchase of principal residence (for employee only, excludes mortgage payments)
- Tuition, education or room and board
- Funeral expenses
- Costs to repair damage to principal house
- To prevent eviction or foreclosure of primary residence
It is important to note that you will be taxed on the withdrawal, and if you take the distribution before the age of 59 ½, there is a 10% withdrawal penalty.
Please contact your plan administrator to see if your 401(k) plan offers hardship withdrawals as well as your employer’s process for administering this distribution. It is important to consult the IRS guidelines and/or a financial professional regarding loans and early distributions.
Can I take out a loan on my 401(k) account?
Some 401(k) plans allow you to borrow on your 401(k) in the event of financial hardship, or for things like buying a car, home improvements, or to pay your child’s tuition. The IRS suggests best practices, and has guidelines on how to prevent the loan from your 401(k) from being taxable. First, the loan must be 50% or less of your total vested account balance up to $50,000. If you already have a loan out against the plan, you must fully repay your outstanding loan before taking a new loan. Unless it’s being used to buy your principal house, it must be repaid in five years or less, and payments must be substantially equal and no less frequent than quarterly. It is important to consult the IRS guidelines and/or a financial professional regarding loans and early distributions.
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.
Please contact your plan administrator to see if your 401(k) plan offers loans, as well as your employer’s process for administering this distribution.
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. Under ERISA law, a judgement must be issued by a state authority in order to grant the payee’s rights in a domestic relations order.
Please contact your plan administrator to find out more about your employer’s process for administering this change.
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