Retirement Planning

What is a 401(k) Plan?
A 401(k) is a company/employer sponsored retirement plan that allows workers to take out a portion of money from their daily paychecks, store it on a retirement plan account and earn interest tax-deferred. Tax-deferred means this saved income is not taxable until you withdraw it at the age of 65 or more.

How do 401(k) plans work?
A 401(k) retirement plan must be sponsored by an employer or an organization. The actual work of administration and monitoring of accounts is usually outsourced to independent banks, mutual fund companies, financial service enterprises and more. As soon as an employee gets a paycheck at the end of the month, he can transfer a portion of it (there are annual limits) to his 401(k) account.

How will my 401(k) account affect my Social Security benefits?
Your 401(k) account will have no effect on the amount of Social Security benefits you will be able to receive. However, it is important to realize that Social Security is not intended to provide for your entire retirement, but is meant to serve as a supplement to other income sources. For example, if your current income is $30,000 per year, the benefit you receive from Social Security will be approximately 40% of this, or $12,000 per year. This percentage varies according to your income. Hence, if you'd like to maintain the same standard of living you had while you were working, you do not want to rely on Social Security to be your only source of income after retirement.

What information is my employer required to provide me regarding my 401(k)?
Legally, all a participant is required to receive is a Summary Plan Description, a Summary Annual Report and an annual statement. You might not receive a prospectus for every fund offered in the plan, but if your company's stock is offered in the plan you must receive a prospectus (or prospectus substitute) for that. Luckily for participants, most plan sponsors provide participants with a lot more information than they're required to. Keep in mind too that often if you need more information all you have to do is ask.

When can I begin to participate?
That depends on the rules of your specific plan. Many companies require new employees to complete six months or even up to a year of service before they're eligible to participate. Some companies also require employees to be at least 21 years old to participate. Ask your company's Human Resources Department or Benefits Representative for information on your plan.

What happens to my account if the company I work for goes bankrupt?
All the contributions made to a 401(k) account are held in trust by a custodian separate from the company sponsoring the plan, meaning that your employer does not have access to any of the money that is contributed to your 401(k). In other words, regardless of whether your employer goes bankrupt or is bought by another company, the vested amount of money in your account is always yours.

What’s the difference between a Roth IRA and a Traditional IRA?
Deciding whether to open a Roth IRA or Traditional IRA is a major decision with potentially large financial consequences. Both forms of the IRA are great ways to save for retirement, although each offers different advantages.

Traditional IRA Profile

  • Tax deductible contributions (depending on income level)
  • Withdraws begin at age 59 1/2 and are mandatory by 70 1/2
  • Taxes are paid on earnings when withdrawn from the IRA
  • Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
  • Available to everyone; no income restrictions
  • All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (subject to exception)

Roth IRA Profile

  • Contributions are not tax deductible
  • No Mandatory Distribution Age
  • All earnings and principal are 100% tax free if rules
    and regulations are followed
  • Funds can be used to purchase a variety of investments
    (stocks, bonds, certificates of deposits, etc.)
  • Available only to single-filers making up to $95,000 or married
    couples making a combined maximum of $150,000 annually
  • Principal contributions can be withdrawn any time without penalty
    (subject to some minimal conditions)

Contribution Questions

How much money am I allowed to contribute each year?
Under current tax law, you may contribute $15,000 (limit for 2006). Thereafter, the limit will increase in increments of $500 for cost-of-living increases. Any previous contributions and your participation in other retirement plans may also affect your contribution limit.

What are Catch-Up Contributions?
A catch-up contribution is any elective deferral made by an eligible participant that is in excess of the statutory limit ($15,500 in 2008), an employer-imposed plan limit, or any limit applied in order for the plan to satisfy the ADP nondiscrimination test for the year.

Who is eligible to make a catch-up contribution?
Plan participants who are or will turn 50 years of age during the calendar year are eligible to make catch-up contributions. However, the participant's regular plan contributions must reach at least one of the following limits before catch-up contributions can begin: the annual deferral limit, the plan's deferral limit, or the annual ADP limit for Highly Compensated Employees.

How many retirement plans offer this feature?
According to Fidelity, 93% of the more than 26,000 employer sponsored retirement plans they service offer the provision.

Are we required to provide this additional elective deferral to our plan participants?
No, a plan is generally not required to provide for catch-up contributions.

If we want to offer the catch-up provision, does our plan have to be amended?
There is a high likelihood that your plan will need to be amended in order for you to allow catch-up contributions. The IRS has provided model amendment language that can be used, but you should immediately check with your legal counsel or record-keeper on what your specific plan needs.

Do the catch-up contributions have to be made from payroll deductions?
Yes, contributions must be made by payroll deduction.

Does the employer have to match these catch-up contributions?
No, an employer does not have to match these contributions. If you don't match, it would be wise to communicate this to your plan participants.

Do we need to show these contributions separately on W-2 forms?
No, the IRS has indicated that regular and catch-up contributions can be reported together on W-2 forms.

How will catch-up contributions impact plan testing?
Among other testing issues, catch-up contributions are not considered when doing the ADP test and they are not considered in determining the amount of the minimum contribution required for a top-heavy plan.

How are these contributions treated for hardship withdrawals, loans or distributions purposes?
Catch-up contributions to a plan are treated for plan purposes as any other pre-tax contribution would be. For example, catch-up contributions would be treated as any other elective deferral when calculating available balances for loans.

If one of our plans permits catch-up contributions to be made, do all of our plans have to permit them?
Yes, if one plan of an employer permits catch-up contributions to be made, then catch-up contributions must be permitted in all plans of the employer permitting elective deferrals ("universal availability" requirement). See IRS Notice 2002-4 for more information.

What other issues do I have to think about if we want to offer this provision?
Actually allowing catch-up contributions within the plan may be the easy part. The harder part may be the implementation. For example, can your payroll system handle the raised minimum for eligible participants? Can payroll segregate catch-up contributions from other pre-tax deferrals? Can the plan record-keeper handle this type of contribution? Are there additional costs involved? How will you communicate this new benefit to your employees, or how will you respond to employees if you don't offer it? How will you train your staff to answer questions related to it? Do forms and other operational issues need to be addressed or changed?

What does vesting mean?
The term "vesting" refers to whether or not the money that has been set aside for you in a retirement plan is yours to keep if your employment is terminated. "Vested" benefits are those to which you have an absolute right even if you resign or are terminated.

Investment Questions

How do I select investments within my 401(k)?
Every plan is different and offers different choices. Contact your Human Resources department and your 401(k) plan sponsor for details. Once you have all the information, feel free to contact us to discuss your specific situation and determine what investments may be appropriate for you.

How often can I change my investment choices? 
That depends on your plan’s rules. Most plans allow switching once a month, once a quarter or twice a year. A few plans allow switching daily, and others only allow it once a year. The law doesn’t say how often they must let you switch. However, the Labor Department’s voluntary 404(c) regulations recommend letting participants move their money among investment funds at least quarterly - more often if the plan offers unusually volatile investments.

The main reason companies limit 401(k) transfers is that frequent switching raises the cost of administering the plan. Besides, there’s something to be said for choosing your investments well and staying with them when you’re working toward a long-term goal such as retirement.

What types of risk will my money be exposed to?
All investments carry some form of risk. Generally, money market funds and short term bond funds are viewed as having the least amount of risk to principal, while stock mutual funds or individual stocks have a greater risk to principal. Before making any investment choices, you should consult with your Human Resources department or 401(k) Plan sponsor, carefully read the prospectus of any investments you are considering and, if possible, seek advice from a professional Investment Consultant. If you would like further information, please click on the CONTACT US link and send us an e-mail with your questions.

Distribution Questions

Can I take money out of my 401(k) plan once it has been contributed?
While 401(k) plans were developed as a means for saving for retirement, there are a few cases where money can be taken from your plan before you retire.

  • Loans: Some 401(k) plans allow for a loan to be taken against funds you have contributed to the plan. Each company has its own provisions for loans and they often require that the money can only be taken if there is an extreme hardship, such as medical expenses, prevention of eviction or foreclosure, purchase of a primary residence, funeral expenses, or post-secondary education. To find out whether your plan offers a loan provision, check with your Human Resources Department or check your Summary Plan Description.
  • Hardship Distribution: As the name suggests, some plans allow for a distribution in times of extreme financial hardship, such as those listed above. However, not all plans allow for this, and if this option is used before the age of 591⁄2, a 10% penalty tax will be assessed on the distribution. You will also have to pay applicable income taxes and will not be able to participate in the 401(k) plan for six months. Check with your Human Resources Department or your Summary Plan Description for more information specific to your plan.
  • Distribution upon termination of employment, death or disability: Upon termination, death or disability, you or your beneficiary will have the option of rolling over your account balance into another qualified plan or IRA (not available to beneficiaries other than your spouse), or taking a cash distribution. If you choose a cash distribution, 20% of your account balance will be held for income tax purposes, in addition to a 10% penalty tax if you are under the age of 591⁄2 (does not apply to deceased participants). In order to defer taxation on a cash distribution, these funds must be deposited in a qualified retirement plan of IRA within 60 days of the date of distribution.

What happens to my 401(k) money if I switch jobs?
401(k) plans provide many benefits to their participants, including the ability to change your investment selections, and in some cases withdraw monies from your plan either in form of a distribution or in form of a loan. Upon termination of employment, you always have the ability to "roll" your 401(k) plan over into a IRA Rollover Account or in some cases, a new 401(k) plan that is sponsored by your new employer. There are many considerations to the decision of terminating, rolling over or simply keeping your existing 401(k) plan. To determine whether a rollover, distribution or loan is the most appropriate strategy for you, please consult your Human Resources Department, a qualified tax professional or call us at 877-401k Guide.

Can I roll my 401(k) money from my old job into my new company's plan?
Yes, if your new company's plan allows rollovers. If you roll over your 401(k) money into another company's 401(k) plan, you maintain the account's tax-deferred status and will not have to pay taxes on your 401(k) assets until you withdraw money from the plan.

If your new company does not allow rollovers, you have two other options that would allow you to maintain the account's tax-deferred status:

If your vested account balance is $5,000 or more and you're under age 65, you can leave your money where it is -- and taxes won't be due until you withdraw money from the plan.
You can roll over your 401(k) into a rollover IRA account. If you request a direct rollover, meaning that the money is transferred directly into the new account, you won't owe taxes until you withdraw money from the account.

How do I apply for a distribution once I have terminated employment with my company?
Once you have terminated employment with your company, you should be sent a distribution package that details your options and also includes the forms necessary to obtain a distribution. Remember that initiating the distribution is your responsibility so make sure that your address is up to date with your employer as well as the administrator of the plan. It never hurts to follow up to make sure your distribution package is sent to you and your distribution is in process.

How soon after I terminate employment can I expect to receive my distribution?
Many factors can affect how long it takes for you to receive your distribution. First, each plan has its own rules for how often distributions can be done- monthly, quarterly (every three months) or annually, for example. Keep in mind that a 401(k) is designed for retirement and is not like a savings account at a bank. You may have to wait anywhere from 30 days to a year or more before receiving a distribution. Typically, 401(k) plans process distributions on a monthly basis. For example, if your plan has a monthly distribution frequency, you will receive a distribution following the close of the month in which your correctly completed distribution paperwork was received by the plan administrator. Depending on many factors, distributions can take 30 to 60 days to process. To find out the frequency of distributions for your company, consult your Human Resources Department or your Summary Plan Description.

Tax & Penalty Questions

Will I have to pay taxes on my 401(k) plan if I leave my company?
That depends on what you decide to do with your 401(k) money. You have several options:

If your vested account balance is $5,000 or more and you're under age 65, you can leave your money where it is -- and taxes won't be due until you withdraw money from the plan.
You can roll over your 401(k) into a rollover IRA account or into your new employer's 401(k) plan. If you do a direct rollover -- have the money transferred directly into the new account -- you won't owe taxes until you withdraw money from the account.

If you elect to take your money out of the 401(k) and not roll it over into a rollover IRA or another 401(k) plan -- you will owe all applicable taxes plus the 10% early withdrawal penalty (if you are under age 59 1/2).

What is the penalty if I take money out of my 401(k) before I'm 59 1/2?
Ten percent of the untaxed money you withdraw, plus applicable federal, state and local taxes on that amount. So if you withdraw $5,000 from your 401(k) before age 59 1/2, you would owe a penalty of $500 (plus applicable federal, state and local taxes on the entire $5,000). To withdraw money before age 59 1/2 and avoid the 10% premature withdrawal penalty, you have to meet one of the following criteria (subject to the rules of your 401(k) plan):

  • you are totally disabled
  • you are deceased and your beneficiary is collecting the money
  • you're in debt for medical expenses that exceed 7.5% of your adjusted gross income
  • you are required by court order to give the money to your divorced spouse (or to a child or dependent)
  • you're separated from service (including permanent layoff, termination, quitting, taking early retirement, etc.) and you're at least 55 years old
  • you're separated from service and you've set up a payment schedule to withdraw money in substantially equal chunks over the course of your life expectancy. (Note that as attractive as this option may sound, once you begin taking distributions you are required to continue for 5 years or until you reach age 59 1/2 - whichever is longer)

Any money withdrawn for the above reasons is still subject to applicable federal, state and local income taxes.

How is the 10% penalty tax calculated?
The 10% penalty applies to the entire untaxed amount that you withdraw. If you withdraw $5,000 from your 401(k) before age 59 1/2, you would owe a penalty of $500 (plus applicable federal, state and local taxes on the entire $5,000). If you've made after-tax contributions to your 401(k), it gets a bit more complicated.

You do not have to pay the 10% penalty or any additional taxes on the amount of your after-tax contributions. You do, however, have to pay the 10% penalty and all taxes due on any interest earned and employer-matching contributions made as a result of your after-tax contributions. If you're thinking "I'll just take out my after-tax contributions and leave the earnings where they are" - nice try, but no dice. For every after-tax contribution dollar you withdraw, the IRS requires you to withdraw a proportional amount of the earnings, too.

To avoid paying current income taxes and the 10% penalty you can roll your account balance over into an IRA. To learn how to open an IRA account and roll over your 401(k) balance, call 1-877-401-5485.

What is an in-service rollover?
Most 401(k) plans will allow active participants to roll their existing 401(k) accounts into a self-directed IRA account of the participants (you) choice once the employee reached age 59 1/2 . If you are over age 59 ½ and have a 401(k), IRS rules allow you to transfer your current 401(k) account into a IRA account, without any tax consequences of penalties due as a result of the transfer. All the while, you will still be eligible to continue to contribute to your 401(k) account. There are many advantages to doing this, however there are also potential drawbacks. Please make sure to CONTACT US to discuss your specific case and gain a more detailed understanding of all of your options before making any decisions.

What is a Fiduciary Liability Insurance?
Fiduciary liability insurance is a popular vehicle for the financial protection of fiduciaries of employee benefit plans against legal liability arising out of their role as fiduciaries, including the cost of defending those claims that seek to establish such liability. Most popular is a stand-alone form or separate fiduciary liability policy.

At least two other types of "coverage" are related to fiduciary liability insurance, and it is important to clarify them. First, fidelity bonds are required by law (ERISA bonding). This is a form of insurance for dishonesty situations. When dishonest administrators or trustees have financially harmed an employee benefit plan, these bonds may be used, but only for the benefit of the plan and the plan's beneficiaries. This bonding insurance will not protect the trustees themselves from liability claims and is thus completely distinct from fiduciary liability insurance.

A second related coverage is employee benefit liability (EBL) insurance. EBL insurance policies cover many claims arising out of errors or omissions in the administration of a benefit plan, including the failure to enroll an employee in the plan as well as the administration of improper advice as to benefits.
EBL insurance does not cover all situations of fiduciary responsibility, especially those regarding imprudent investment of funds. Fiduciary liability insurance coverage may or may not encompass EBL insurance coverage—the insurer involved, the purchasing entity, and the specific type of fiduciary liability coverage being employed will ultimately determine what scope of coverage is available.

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