Question: What exactly is involved in a monthly
valuation? Is the fund valued only as of
month-end or is the month's activity somehow accumulated?
TB: The term "monthly valuation" is typically used to describe the process
involved in updating
participant accounts. Participant accounts for plans that are not updated each day are
updated at
specific intervals such as monthly or quarterly. The participant recordkeeping is usually
performed
on systems that do "balance forward accounting." All activity (contributions,
distributions, investment
income and investment gains) from one valuation period to the next is batch-processed at
the end of
the valuation period.
The investments held by the plan may actually be mutual funds that are updated each day.
With this
type of participant recordkeeping system, even if the actual investment funds are updated
daily, the
only updating of participant records is at the end of valuation period. The participant
accounts are
maintained solely as dollar values rather than as shares of the applicable funds. As a
result, it is
impossible to determine individual account values at any time other than on the actual
valuation
dates.
Question: There is a significant difference in age between my wife and me. If she
quits her
job (i.e. retires) and subsequently I die, will the balance of my 401(k) accounts roll
over to
her 401(k) accounts, and thus prohibit her from making withdrawals until she reaches
59ý? Or, would she be able to make periodic withdrawals from the 401(k) immediately and
continue until she reaches 59ý?
TB: Your wife would have the option, upon your death, to have your 401(k) account
transferred
directly to an IRA. If she does this, the IRA withdrawal rules will apply. She may also
receive your
benefit in a lump sum or in installments if your plan permits. Most 401(k) plans permit
only lump
sum payments. You should check with the person at your company who oversees your plan to
find
out whether your wife will be permitted to withdraw the money in installments.
If she will need to receive this money as a stream of income after you die, her best
option may be to
roll the money into an IRA and to take an "annuitized" form of payment. A
representative from a
mutual fund company should be able to explain exactly what she will need to do.
Question: If you contribute after-tax dollars to a 401(k) account, will you be
double taxed
on those dollars when you start to withdraw money at age 59ý? If so, does it make sense
to continue to contribute?
TB: Any money you contribute to a 401(k) from your after-tax income is taxed only once,
prior to
going into the plan. The investment income your earn on the money you contribute from your
after-tax income is not taxed until you withdraw it from the plan. You get the benefit of
tax-deferred
growth. The other advantage you get is the automatic savings that occur through payroll
deduction.
Most of us lack the discipline to save as effectively if we have to do it on our own
outside the plan.
Question: We're a small Internet-development company (nine employees and one
owner)
and want to set up a 401(k) plan for the employees. We're overwhelmed by the sales talk.
Can you provide any resources for employers to figure out which way to go, with the
lowest fees to employees. For example, should we use third party administrators? And who
should be in charge of picking funds/stocks and maintaining the accounts, etc.?
TB: The options available to small employers wanting to set up a plan are very limited.
Most
providers are interested in plans that already have a sizable amount of assets because
most of the
income comes from the investment management fees.
One of the best alternatives is to establish a SIMPLE-IRA by working directly with a good
mutual
fund company. You'll be able to establish and operate a plan without any fees other than
the regular
investment management fee. But, you must contribute the applicable employer contribution.
Question: I earn $42,500 a year and claim zero dependents. Can you suggest a
minimum
dollar amount I can contribute to my 401(k) plan, which will lower my tax bracket?
TB: The marginal tax rate for a single taxpayer is 28% for all taxable income above
$25,750. You
will enjoy a 28% tax deferral for any amount you contribute. The maximum amount you're
permitted
to contribute to your 401(k) plan in 2000 is $10,500. However, that amount would have to
be
reduced if your employer also makes contributions to the plan. The reason is that combined
employee/employer contributions may not exceed 25% of your pay.
The minimum amount I recommend contributing is the amount that's matched by your employer
so
you take full advantage of any employer contributions. If you're in the 40-plus age
category and
have limited retirement benefits accumulated, you should contribute as much as possible.
Regardless
of your age, you should use a retirement calculator to help you determine how much you
need to
save to meet your retirement goals if your haven't already take this step.
Question: A very curious situation has arisen regarding my wife's 401(k) plan. Her
employer recently granted a discretionary contribution to her 401(k) account, consisting
of
two parts, a profit-share and an employer match. The strange part is that the contribution
didn't come from the employer, but was deducted from my wife's gross pay! To top it off,
even the employer-match portion of the 401(k) contribution came out of my wife's salary!
This isn't a partnership, but an employer-employee relationship. Is this a common way for
employers to make discretionary contributions to employees' 401(k) accounts?
TB: I guess there is always something new. This is the first time I have heard of such a
situation.
Frankly, this sounds like a scheme that will permit the account holder to exceed the
$10,500
maximum elective deferral (employee pre-tax) contribution limit without costing the
employer any
money (i.e. without the employer actually contributing money to the account). This is a
most unusual
arrangement and it clearly isn't within the intent of the law.
 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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