Company 401k Plans

Top 50. Jan 18, 1999 9:07 AM

» TimYounkin - taking action

If your 401(k) plan has high fees and crummy returns you probably have a right to complain to your benefits department. Ellen E. Schultz, a writer for the WSJ has written some recent articles touching on these issues. She states to pay attention to the fees your funds charge. If you are paying a 12b-1 fee you are paying too much. If you are also paying a sales load or a surrender charge, you are paying too much. The average annual expense ratio for a balanced fund is 1.37 percent of assets; if you are paying more, you are probably paying too much. I'll go a step further and say not to pay more than 1 percent of assets in fees and preferably much less.

Ellen Schultz ends with, if you discover that your funds have crummy returns and high fees, complain to your benefits director. The company has a fiduciary duty to choose funds with reasonable quality and fees. The DOL states this also in their final report.

You can compare your funds with research done by Morningstar; you can also check the February issue of Money magazine. It has a detailed mutual fund guide for 1999. In order to check the fees your 401(k) plan may be charging you, you will have to ask to see the prospectuses for each mutual fund in addition to the prospectus of the company in charge of the 401(k) plan. As a 401(k) plan participant, they must give you your requested prospectuses if you ask for them. Inside you will probably find fee tables. Add up all the fees and see if they tally up to more than 1 percent of assets.

If your employer insists on passing the buck to its employees then maybe distributing that fee among the employees evenly may be an option. To have the fee tacked on as a percent of assets is really the worse and most expensive way to pay for a retirement plan

If you go the route of complaining to the benefits director - a word of caution. Don't be confrontational or aggressive. Just let them know you are concerned about the poor performance of the limited funds you may have to choose from. If the fees are high, show the director documentation from other articles what should be acceptable. You might want to also point out that having a good retirement plan can actually be used as a tool to recruit all star employees. I am sure the last thing you want is to get fired over this or have management do away with the retirement plan altogether especially if they are giving employees some employer matching contribution. There are a couple of articles on my links page that may help those who want to lobby for a better 401(k) plan. Good luck.

-- posted by TimYounkin

Top 51. Jan 18, 1999 9:23 AM

» JenL_3 - Tim's 401K plan Website

Thanks Tim!

Geezard - Tim introduced his website back in messages 1-10 of this thread, and it's good to read back through all the messages in this thread for further information. Here is a link to Tim's Website.....J.L.

-- posted by JenL_3

Top 52. Jan 18, 1999 1:49 PM

» geezard - Thanks for the Sound Advice

Thanks for all the good advice. I had already approached Benefits (research in-hand) and expressed my concerns. The bottom line was these are the funds we are staying with. Even after showing proof that one of the new ones ended 1998 with a minus 2 (the small cap) I was told we will stay with these funds. I feel I am being forced to shop at the bargain basement at Macy's with my retirement dollars. I did strike a nerve however as all employees received a notice in the mail stating that the Company is filing notice determining plan qualification as to Sections 401(a), 501(a) and 403(a) of the Code and stating we could get a copy of the SPD upon request. Does anyone know what IRS statutes this refers to or if this mailout is standard when a company changes funds managers? It takes 10 people to establish cause for IRS to investigate and we have a few weeks to do so in writing. I'm not sure if this appeal would be in the best interest of the employees or not. Any thoughts? I do know that past statements have been unclear as to dates of transactions and return information on specific funds, and balances were questionable, but the Benefits folks are trying to workout the kinks, and everyone is hopeful the new fund manager will be a great improvement. My main concerns again are fund choices, proper diversification, fees and risks. I'd hate to chance losing this great benefit however, and would rather work with management than against them showing them the discrepancies and ways to improve. Is it also possible there may be reason to disqualify our plan due to the fact that the employer matches the fund with company stock and this is also a fund choice? Could this possible be an over-weighing of the overall plan w/company stock? The company does give us a generous profit sharing and don't know if that consideration can have a bearing on setting up their 401(k) plan as far as compliance guidelines. As I said before, they are doing too much right, to be so inadequate in the 401(k) plan preparation and monitoring. I have researched these funds using many vehicles and none seem great. Blatently some are even misstated for accuracy in the company handouts as to histories and returns, but it looks like old insurance portfolio stuff probably supplied by the new fund manager. One fund has no morninstar rating as it is too new to research but seems to be a spinoff of another one, and possibly set up as an advisor class for institutions, and, for now, it is one of the better performers they offer. With small exception, most are insurance-type product funds. Does anyone know anything about IDS funds? I still would like to know if institutional funds are a good thing for employees or not and welcome any enlightment on this. Some of these funds are difficult to follow and don't know why they would even include a small cap or int'l in this market. Also, one is a collective equity income trust fund and not publicly traded, and would I want to invest in a non-publicly traded trust fund? I am concerned that the diversification is not good (i.e. small cap, int'l) and would like to see better funds as you mentioned above such as Contra, Magellan, Vanguard, but don't think this is a viable option to us anytime soon. I may be in a grin and bear it situation because I feel they are probably in compliance but just not taking the best moral approach as to doing the best they can, and have probably entered into investment contracts with little leverage for moving in or out, but this is just a guess. I will check the prospectuses for fees as adviced. I am not sure that the class y fees are structured the same as noted in the prospectuses however. I will continue to gently persuade management for better selection and monitoring of funds as suggested. I feel my company may have fallen prey to an over-zealous fund management company and may place more concern on admin. costs in setting this thing up than fund performance. I agree with you that there is no reason to pay more than 1% in fees. Thanks for all the good sound advice and, as always, all suggestions and further advice are welcome, especially with respect to this IRS compliance notice. Now that field representatives are admitted to the plan, we probably have 2000 employees able to invest in this plan, and I'd hate to see us lose it, even given the lackluster fund offerings.

-- posted by geezard

Top 53. Jan 18, 1999 9:57 PM

» TimYounkin - Contribution Limits

Here is a little more on the 401(k) plan contribution limits. The cap is tied to the consumer price index. Then a 1994 law decreed that the limit would rise only in $500 increments. So when inflation is low, the limit may remain the same for two years (1996,1997). Prior limits were 1987-$7,000,1988- $7,313, 1989-$7627, 1990-$7979, 1991-$8,475, 1992-$8728, 1993-$8994, 1994-$9,240, 1995-$9,240, 1996&1997 $9,500, and 1998 was $10,000.

For many employees, a more important limitation is the one imposed by the ADP, or actual deferral percentage test. This test, which is typically called a "nondiscrimination test," is mandated by the government to determine that the plan is not unfairly favoring its higher-paid workers-defined under the 1996 tax act as those who earn more than $80,000 a year. To comply with government rules, every 401(k) plan must pass the test for each plan year.

Here's how the test works:Contributions made by employees earning less than $80,000 for 1997-the number is indexed-are tossed into a pool to determine the average percentage of salaries they contribute to the 401(k). These are the non-highly compensated employees-or non-HCEs in regulatory jargon. Then the average salary contribution is calculated for people who earn more than $80,000. The spread between the two groups is regulated: In most cases, it is limited to 2 percentage points. If the lower paid group contributes 4 percent of salary on average, the higher paid group can contribute no more than 6 percent on average.

Suppose a company discovers that its highly paid group is contributing an average on 7 percent and its lower paid group only 4 percent. It must then return some money-which is taxable income-to the higher paid group. A 1997 tax change says that the company must return the money first to those in this group who contributed the most actual dollars. So it is unlikely that participants in the highly compensated group would be permitted to contribute the full $10,000. However, the employer would be delighted if an employee earning $79,995 contributed the full $10,000-or 13 percent of his salary-because that would boost the average for the non-highly compensated group.

The salary deferral limit is only one of the stipulations you face when putting money into your 401(k) plan, though. Section 415 of the Internal Revenue Code imposes a limit on the total contribution made by and for an employee to a 401(k) plan. This includes the deferral limits just discussed as well as profit-sharing contributions. The combination of all these contributions may not exceed the lesser of 25 percent of the participant's compensation or $30,000.

-- posted by TimYounkin

Top 54. Jan 19, 1999 7:31 AM

» TimYounkin - same desk rule

It is the opinion of the IRS that an employee is separated from the service only upon his death, retirement, resignation or discharge, and not when he continues on the same job for a different employer as a result of the liquidation, merger or consolidation, etc. of the former employer" This is what is referred to as the "same desk rule"
You will not find the term in the code, but there are a number of citations where the service has made their position known.

Among them are:

Rev. Rul. 80-129
"Consequently, the termination of the employing entity did not result in a separation from the service, since the employees did not die, retire, or resign; nor were any of the employees discharged from employment. Rather, the employees continued on the same job for the successor partnership."

In Rev. Rul. 81-141, the service stated
"Merely changing the form or transferring ownership of an employer will not give rise to a separation from the service."

Letter Ruling 9443041, (Aug. 04, 1994)
"In the case at hand, the issue is whether Group B employees incurred a separation from service on account of their discharge by Company A, notwithstanding the possibility of continued employment with a Producer. While there is no liquidation, merger, transfer of corporate assets or any other corporate transaction associated with the discharge of any employee, nor will there be a Company A directed transfer of assets and liabilities from Plan X or Plan Y to any plan of a Producer, or of plan sponsorship from Company A to a Producer, your representative has indicated that Company A and the Producers have maintained a contractual relationship throughout the years, and there will be an ongoing relationship between Company A and the Producers. Also, although there will be a change in supervisory personnel, the work of the Group B employees may stay the same, and the Group B employees will be working at the same location as when employed by Company A.

Accordingly, we conclude with respect to your requested ruling that a distribution from Plan Y to a discharged Group B employee under age 59-1/2 will not be considered as made upon a separation from service within the meaning of section 401(k)(2)(B)(i)(I) of the Code, and section 1.401(k)-1(d)(1)(i) of the regulations, when the employee is subsequently employed by a Producer."

When an organization is dissolved and its business continued by a successor organization, employees who continue in their same jobs with the successor partnership are not considered to be separated from the service.

I don't think the same desk rule is preventing you from receiving 100% employer matching. Rather the IRS Code section 415 limits you and your employer only up to $30,000 or 25 percent of your pay each year, whichever comes first. That total includes all contributions to your account (pre-tax and after-tax, by you and your employer) from all defined contribution plans (401(k), thrift, profit-sharing, ESOP, and money purchase).

-- posted by TimYounkin

Top 55. Jan 20, 1999 8:07 AM

» JenL_3 - Contribution Limits

This from Money.com MoneyDaily 1/20/99:

The latest in 401(k) news. . . Senator Grassley introduced the Enhanced Savings Opportunity Act, which repeals the 25% of compensation limit on combined employer/employee contributions to defined contribution plans.

(So does that mean that the 25% contribution limit has been repealed, or does it still have to be passed by the senate and house and signed by the president before going into effect? And when would the new 401k contribution level take effect - 1999?).....J.L.

-- posted by JenL_3

Top 56. Jan 20, 1999 10:06 AM

» JenL_3 - 25% Maximum Contribution Rule

Thanks Kirk for the Civics 101 review. Do you think the 25% maximum contribution rule will be repealed?....J.L.

-- posted by JenL_3

Top 57. Jan 21, 1999 1:52 PM

» davekro - A happy 401K story

My wife recently started with a new company (S.A.P.). I had heard many glowing things about their perks. But when we recently got her 401K info in the mail showing the 401K plan is with Vanguard, I WAS REALLY IMPRESSED! She can choose between 14 Vanguard funds, including the 500 index fund (which I will recommend). It is encouraging to see that a company CAN make an informed choice for their employee's best interest.

My sincere best wishes to all trying to 'educate' their companies benifits departments. Lets hope in the years to come that benifits departments catch up on the learnig curve.

Best Regards, Dave.

-- posted by davekro

Top 58. Jan 21, 1999 2:54 PM

» TimYounkin - Here here

Here, here. I totally agree with Kirk. I also wish we were allowed to sock away more than just $2,000 into our Roth IRA each year. Unfortunately, I don't see this happening anytime soon. How is this for an idea? Just let the employees themselves select and manage up to $10,000 in their own personal 401(k) plans. After all, if congress trusts us to manage our own IRA's, why not our own retirement plans. In know it may get complicated with payroll however I would much rather pay my taxes and then get a refund at the end of the year for any money I may be allowed to invest in my own personal retirement plan. If some employers can't accept fiduciary responsibilities by selecting an appropriate retirement plan for their employees then either congress should get tougher on employers or just let the employees select and manage their own retirement plan.

-- posted by TimYounkin