Question: Is there a way for an employer to contribute unused sick leave accruals into a 401(k) plan as a nonelective contribution?

TB: Contributing unused sick leave was a hot issue several years ago when the IRS issued a favorable ruling; however, the ruling attracted so much attention that the door was closed. If my memory is correct, those contributions were elective contributions (meaning the employee, rather than the employer, made the decision to put them in the plan).

The law provides a lot more latitude with respect to nonelective employer contributions; however, these contributions must still satisfy all applicable regulations.

One issue is the fact that this contribution would vary by employee and would not be tied to a specific formula. This fact would require a custom-designed plan document rather than a prototype, which many employers use. Using a prototype plan document allows employers to quickly set up their plan at a lower cost.

If you want a customized plan document, you will need to explore this possibility with an ERISA attorney or pension consultant who does this type of work.

Question: My company does not offer a match for the 401(k) plan. Is it better to invest in a Roth IRA and put any extra savings into a tax-efficient mutual fund account?

TB: A Roth IRA is better than a deductible contribution to a 401(k) only if you expect your tax bracket at retirement to be higher than it is now. Otherwise, you are probably better off putting the money in the 401(k) to get the tax break up front plus the tax-deferred growth. I would consider the Roth IRA and tax-efficient mutual funds option only if the investment choices in your 401(k) plan are really bad.

A noneconomic factor to consider is whether you have the discipline to save the same amount if it isn't deducted from your paycheck. Most employees are unable to maintain the same rate of savings when they attempt to save outside of their 401(k) plan.

Question: In my company's 401(k) plan, each participant has the option of investing their money in six investment funds. However, the plan only allows me to contribute to those investments in multiples of 10 percent. Is this a normal limitation for most 401(k) plans?

I would like to see the limit changed to a minimum of 5 percent. This would allow me to properly allocate my investments utilizing all of the six investment options. I would like to put 15 percent in each of five funds and 25 percent in the sixth. What can I say to coerce my company into changing this annoying and needless limitation?

TB: This design has been selected by your employer and it is legally acceptable. There are two reasons I am aware of that may be why your employer has set these limits. The first is the fact that many participants make selections that don't add up to 100 percent. Multiples of 10 percent increase the likelihood that employees will get the math right.

Another reason for these limits is to force employees to diversify to a greater degree than what would otherwise be the case. For example, when 1 percent multiples are permitted, an employee may pick 97 percent, 1 percent, 1 percent and 1 percent. I have seen this happen.

I recommend submitting your comments to the person who oversees the plan at your company. Include your suggestion to change the multiples to 5 percent increments instead of 10 percent. To back up your argument, add an illustration of the allocation you would like to achieve. This is an easy change for your employer to make and there shouldn't be any reason for it not to do so.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most 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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The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

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