Question: I started a new job and was told by Human
Resources that I could start
participating in the 401(k) after 90 days. Later, the benefits administrator said I had to
wait a year before participating, or until January 2001. I expressed disappointment about
not being allowed to participate sooner. Then I was told I could start participating in
the
401(k) in July 2000, and I could double up my contributions to 30% of salary instead of
just 15% (15% current max contribution) to make up for the lost months in 2000.
Is it possible to double up the contribution? Who decides? Is it the employer or the
federal
government? If it's based on the plan, is it flexible or is the employer locked in to a
designated contribution?
I really don't want to be disappointed in July and learn that once again my new employer
is
giving out false hope and information about my 401(k).
TB: Your employer is permitted to establish the rules for its plan, subject to the
applicable legal
limits. Employees may be excluded from participating until the first entry date after
completing a year
of service, based upon the definition of service the employer selects. The eligibility
rules the
employer sets must be followed uniformly. Frankly, I'm puzzled by the answers you've
received
from your employer because your plan should have specific rules, which must be followed.
The maximum amount you're permitted to contribute is 25% of the pay you receive after you
become eligible to join the plan. This percentage must be reduced by employer
contributions. For
example, if your employer contributes 3%, you may only contribute 22%. You may contribute
30%
only if you are eligible for the entire year 2000 and you decide not to contribute during
the first half
of the year. If you're not eligible to join the plan until July 1, 2000, the combined
employee/employer contributions may not exceed 25% of the gross pay you receive from July
1,
2000 through December 31, 2000.
Question: What happens to a vested 401(k) plan if a company files for bankruptcy?
In
particular, what happens to employee's contributions?
TB: The amount that was deposited into the plan before the company went out of business is
not an
asset of the company. These funds must be used to provide benefits to the participants.
However,
the financial organization that holds the money must wait for instructions from the
committee or
individual that has this responsibility. Unfortunately, these individuals may be hard to
find. I
recommend contacting the financial organization that managed the plan and anyone from the
company you can locate who may be able to help. Money held by a third party financial
organizations is safe but it may take a while to get it.
Any money deducted from your pay that wasn't submitted to be invested prior to bankruptcy
will be
locked into the bankruptcy process. Any recovery of this money will be dependent upon the
results
of this legal process. You should also consider calling the Department of Labor at
800.998.7542 to
alert them to this situation.
Question: My husband has just been diagnosed with terminal cancer. Can we withdraw
money from his 401(k) account to use to fill the gap between his disability insurance and
his regular income or for things he would like to do before he dies?
TB: I'm sorry to hear about your situation. My wife has been fighting the same disease. If
your
husband is no longer employed, you may withdraw the entire amount and do whatever you want
with it. The amount you withdraw will be taxable and it may be subject to the 10% penalty
tax. The
penalty tax may be avoided by setting up an "annuitized" form of distribution.
If he's still employed,
he should be able to withdraw money as a hardship withdrawal.
I know it may be difficult to consider at this time, but you also need to retain as much
as possible for
your own future retirement needs.
Question: My 401(k) plan is with Guardian. My co-workers feel it's a lousy plan
with very
poor returns overall. We'd like to ask our employer to change fund companies. Where can
we find comparison data to give to our employer?
TB: If you want to compare the performance of the specific funds, you should look at the
annual
returns for your funds and compare them to returns from similar classes of funds. For
example, if
you have a large-cap growth fund option, compare it with the results of other large-cap
growth
funds.
Their 1999 returns should be appearing shortly in financial publications. You can also
look up fund's
annual reports on the Securities and Exchange Commission's EDGAR filings site:
http://www.sec.gov/edaux/formlynx.jsp. Once you have this information, you can then
present the
comparative results to your employer.
However, given your specific situation, I suspect the major issue is that your company has
a variable
annuity product with an added fee. The plan you're in probably has an extra 1% or so per
year
asset-based fee which you're paying in addition to the normal fund management fee. If this
is
correct, this extra fee will result in a substantial reduction on the amount that will
accumulate over a
long period, such as 20 years. The Department of Labor has a booklet about fees that's
useful. You
may obtain copies by calling 800.988.7542.
In all likelihood, your company is using brand-name funds. Except for the fee
differential, the issue
probably isn't the performance of the funds, but it's likely an additional fee that's
being incurred.
Question: I was just forced out of my company after 27 years. I'm 52 years old. As
part of
my severance should I ask for an opportunity to remain an "employee" until I
turn 55 so
that I can draw from my 401(k) and not pay the penalty?
TB: It's highly unlikely that you will be able to remain in an active employee status
because you will
need to receive compensation and possibly benefits. One way to avoid the penalty tax is by
structuring your distribution as an "annuity". You should discuss this option
with a representative
from a financial organization prior to rolling over your 401(k) money into an IRA.
Question: My 401(k)-plan administrator claims that they can't provide detailed
information on when my contribution bought the funds and at what price. Is it true or are
they just incompetent? Do I have any rights in terms of gathering detailed information on
my contributions?
TB: The organization that's managing your plan probably uses what is known as a
"balance
forward" record keeping system. Participant accounts are tracked solely in dollars
with this type of
system rather than as fund shares. All investment activity is batch processed after each
valuation
period ends and the investment gains and losses for the period are allocated using various
assumptions. This type of system is much less precise than daily or "real time"
systems. That's the
primary reason why fewer and fewer plans use this type of record keeping system. It is,
however,
legally acceptable.
In answer to your specific question, the only information your employer is legally
required to provide
is an annual statement of your account if you request such a statement. There aren't any
specific
requirements regarding the contents of the statement. You're undoubtedly receiving
substantially
more information than what is legally required and the information you are receiving is
probably the
best that can be provided from the current administrator. At some point, your employer
will
probably consider changing.
 Read Ted Benna's Biography
Ted's Table Archives
Ted Benna, creator of the first 401(k) retirement savings
plan, answers intriguing questions every Tuesday. With over 30 years of experience as an
employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He
has authored two books, Helping Employees Achieve Retirement Income Security and Escaping
the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a
frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and
comments have appeared in numerous publications, including The New York Times and The Wall
Street Journal.
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