After you open the word document, please read the seven pages carefully, if you did so you will find that there are three parts in total by the order form top to bottoms such as part 1, part 2, and part 3, this is because this is a group project did with 3 group members. important I need you to help me to modify my draft I want theses tree parts to be seamlessly connected and smooth in reading and understanding secondly, I hope you can seriously modify the vocabulary and correct the grammar finally, in the third part, please write a 300 words summary and conclusion.
We choose 401(k) as our project topic because we realized that many families ofAmerican doesn’t have enough savings. For example, many American parents let their children pay their own college tuitions or loan their money because of they don’t have enough savings to cover the college tuitions. Furthermore, many American workers have higher chance to become homeless if they lost their jobs because they don’t have enough savings.
All of our group members are from China with the same Chinese culture background. After our discussion, we realize that were lucky because our parents paying out college tuitions. And, if we get fired by our boss, we will be able to use the savings that we saved through the past few years to maintain the current life situation.
We were wondering is there any policy to encourage American families save their money, and we decided to do the topic of 401(k) after our research.
Background of 401K
According to Tim Stobierski, an online financial advisor from Northwestern Mutual, states that “401(k) plan were created almost by accident. It started when congress passed the Revenue Act of 1978, which included a provision that was added to the internal Revenue Code – Section 401(k)-that allowed employees to avoid being taxed on deferred compensation” (Stobierski, 2018).
Originally, 401(k) was designed to be a tax-friendly program. “Benefits consultant, Ted Benna, came up with the idea to allow employees to save pre-tax money into a retirement plan while receiving and employer match”. (Stobierski, 2018).
The name of 401 (k) retirement plan was made based on the Section 401(k), a tax-friendly idea, under the Revenue Act of 1978. 401(k) retirement plan encourage many American families make savings.
How 401(k) works
There are two different types of 401(k); Traditional and Roth. These two types of 401(k) serving the same purpose-encourage American families to save money for their retirement. However, there are slightly difference between Traditional 401(k) and Roth 401(k).
Traditional 401(k) allows people to contribute their money to retirement plan before tax. It helps Americans to lower their taxable income by not paying any taxes on contributions until they decided to withdrawals in retirement.
On the other hand, Roth 401(k) made people to contribute their money to retirement plan after tax. It doesn’t help Americans to lower their taxable income. However, they will not pay any taxes after the retirement.
Both of 401(k) plans are made to encourage Americans to save money for retirement. There are no exactly bottom lines of how much money do they want to save. On the other words, how much they decide to contribute to their 401(k) is up to them.
Goal for this project
For this group project, we will explain the benefits of 401(k), and why American need it in today’s society. We will provide several outside resources and articles to support out argument. Additionally, we will provide our insight on 401(k), talk about how we feel about 401(k) retirement plan.
We believe 401(k) is another way of long -term investment that f=guarantees American citizens to have enough savings after their retirement. With retirement funds, people could fulfil their retirement life such as travel around the world, live in beautiful countryside, and experience new things. The 401(k) helps employees to save and invest their retirement funds while they are working.
401(k) plans have increased in popularity in the U.S. because of their ability to ease the saving processes for retirement. The 401(k) plan uses the tax deferment strategy to encourage saving for retirement. The funds saved through the retirement saving plan becomes accessible to the members after they pass the age of 59.5 years (Benna and Newmann). The plan allows people to choose between its Roth 401 (k) and Traditional 401 (k) depending on the time of taxation, which only occurs once (Benna and Newmann). Notably, Roth 401 (k) allows taxation of funds before contribution while Traditional 401 (k) allows taxation of at the time of withdrawal. The 401(k) program has created debate among U.S. citizens since its establishment in the 1970s based on its limitations and strengths. Despite the criticisms, we still feel that the 401k is beneficial and a good long-term investment.
The 401(k) program is based on the Internal Revenue Service (IRS) that allows employers to establish a retirement saving plan for their employees. However, employers allow their employees to choose between post-tax (Traditional) and pretax (Roth) plans regarding their contribution to the 401 (k). IRS also established the limits on total contribution to the 401 (k) plans to depend on the rate selected by the employers (Papke). Furthermore, the Employee Retirement Income Security Act (ERISA) is involved in setting eligibility parameters for contribution to 401 (k) plans. ERISA also allows employers and employees to contribute separately to the program. ERISA and IRS allow privately and publicly owned corporations to offer 401 (k) plans to their employees.
Notably, 401 (k) plans offer individuals benefits and opportunities for the compounding of savings over time. Individuals, therefore, are advised to comprehend their 401 (k) plans before they embark on the making of contributions. Perfect plans, in this case, are characterized by six key elements. Firstly, good 401 (k) plans should maximize members’ contribution rates and participation in decision making. Members should be allowed to choose plans depending on the level of contribution, manner of contribution, and taxation strategy. Secondly, good 401 (k) plans should promote and provide incentives for people’s savings. Roth 401 (k), for example, allows individuals to lower their taxable income hence increasing their retirement savings. People increase the size of their savings to increase the amount of interest earned on their savings. All 401 (k) accounts allow members to earn money on the funds saved. The 401 (k) plans increase profit margins through a reduction in the taxes on the accrued interests on the savings. Thirdly, good 401 (k) plans offer members education on informed decision-making processes regarding investment, planning, and saving. Employees and employers are enlightened on the rules and regulations of the plan (Poterba). The education provided, in this case, also includes the size of contribution and eligibility for the plan. Fourth, good plans are supposed to maximize participant satisfaction through service quality, education, and profits. Finally, the plans act as effective tools for attracting and retaining employees in workplaces. The 401 (k) Plans offer participants opportunities for increasing the level of retirement savings through tax deferment and interest benefits.
Although 401 (k) plans are beneficial to the participants, they are criticized because of their imperfections. Firstly, critics observe that the dollar-cost averaging concept for the 401 (k) plans is sometimes unreliable. The critics observe that the dollar-cost averaging concept is normally presented in the 401 (k) plans promotion programs as an efficient investment method. The critics argue that the dollar-cost averaging technique only appears convenient at a theoretical level to justify its effectiveness. The theory eventually leads to the overvaluation of an individual’s savings during the contribution period. However, the counterarguments show that individuals can control their savings by funneling them to a conservative option within the retirement plan (Munnell and Sundén). Secondly, critics observe that the 401(k) plan does not support flexibility among employees because of its long-term focus. The critics, in this case, observe that employers are allowed to create 401(k) plans for their employees with regards to long-term saving. The strategy creates problems for employees once the management of company changes, which creates a mismatch between short managerial tenure and its long-term focus. However, the mismatch can be mitigated using the index funds. Thirdly, the 401(k) plan is regarded as a costly retirement saving option because of its high fund expenses and participant fees. The costs are extremely high for small businesses without economies of scale. Fortunately, participants can mitigate negative costs associated with their 401(k) plan through the development of a tailored saving plan. Finally, the 401(k) plan is criticized because of the complexity of its recordkeeping process for assets. Furthermore, the recordkeeping process is also time-consuming hence inconveniencing participants. Sometimes, individuals are forced to calculate the rate of return on their investments manually.
Although the 401(k) plan is associated with some weaknesses, the plan is beneficial and an excellent long-term investment. Some of the challenges of 401(k) include the unreliability of its dollar-cost averaging concept, lack of flexibility, massive fees, and recordkeeping inefficiency. However, participants in the plan can mitigate the problems effectively hence accomplishing their goals. Notably, the 401(k) plan offers individuals opportunities for increasing their retirement savings. The plan also offers business organizations opportunities for attracting and retaining employees, which eventually maximize their productivity and capacity for innovation.
In 2018, there are more than 58 million U.S. workers actively enrolled in 401 (k) plans, with more than 580,000 401 (k) plans for residents of the US. As of December 31, 2019, the US had an estimated $6.2 trillion in assets which represented more than 19% of U.S. retirement assets at $32.3 trillion. That includes the majority of the 401K program assets; the 401K plans have $3.1 trillion in assets, or 17% of the U.S. retirement market (Investment Company Institute).
More Americans choose to invest in the 401K program since they are young ages. First of all, because the money invested in a 401K is not required to tax at the time, and only tax when the employee is old enough to receive it. The current money is always more valuable than future money. When people save the money in a savings account or brokerage account, they have to pay income tax, even though they may have benefited from saving or investing in bonds, funds, or stocks, the 401K plan saves their money for future use without an additional fee and part of the annual tax.
Meanwhile, 401K is a saving program with benefits. The retirement plan is a long-term saving, the 401K plan provides an active interest as the benefits of saving.
Compared with the plan of the IRA (Individual retirement account), the 401K plans provide a higher contribution limit. In 2020, the contribution limit of IRA is $6,000 and, if contributors who are 50 or older, $7,000. For 401K plans, the limit is $19,500 if under age 50 and $26,000 if 50 or older. Therefore, it represents that the 401K plan has a lower taxable income. Meanwhile, since the company provides the 401K plan, this plan is more secure and benefits the employees than the IRA. The eligibility of the plan is available for every employee, so there is no limitation to the income. Even the money invested in the 401K plan, it is not saved without withdrawals. When the investors change their jobs, they are available to make decisions to transfer money to an IRA, which makes the plan more flexible and functional.
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