Question: I joined my new company's 401(k) plan as
soon as I was eligible. Once
purchases began, I noticed that the prices for the mutual funds I chose were higher than
any other quote I could find. A $10.50-per-share fund, based on quotes via any Internet
quotation bureau, costs $13.50 per share through my plan.
I've put in almost $10,000 over the last year, buying shares at the plan's price. But,
when I
compare what my money would have bought on the open market, it comes to just under
$8,000. The 401(k) company claims that it's because they do business in every state, so we
have to pay a higher price per share. I don't believe them. Their logic is when I cash out
I'll still receive the higher price. I feel I'm being ripped off and losing out on
long-term and
capital gains.
I can't get any help in my company. However, when I point this out to coworkers, they're
outraged. I understand I can't take my money out until I quit. Is there anything we can
do?
TB: I must admit that I don't fully understand what is happening.
The spread between $13.50 and $10.50 a share is very large. It would appear that either a
front-end load and/or some administrative fee is reducing the amount being invested. If
this is
correct, the shares that you see credited to your account are being purchased at $10.50
per share
but you're getting fewer shares because a substantial portion of your contributions
haven't been used
to purchase shares. For example, assume you contribute $100 but $25 is deducted for
expenses
and only $75 is left to purchase shares. The $75 would purchase only 7.143 shares. This
would
result in a real cost per share of $14. The value of your shares must increase by 33.333%
before
you'll break even.
You're correct that you may not take your money out until you leave the company. You may
however stop contributing to the plan. You say you can't get help from your company. I
recommend
telling the person who oversees the plan at your company that you will stop contributing
if you don't
receive a satisfactory answer.
You may want to also tell this individual that you will contact the Department of Labor if
you are
unable to get a full explanation of what is happening. The number for the DOL is
800.998.7542.
Good luck, and keep me informed of your progress.
Question: Please explain the regulations behind PS-58 costs and the reporting
requirements.
TB: The PS-58 regulations are rather complex. So, the best I can do is give you a general
overview.
PS-58 is applicable to qualified retirement plans that provide life insurance and/or
disability
insurance benefits. Years ago the U.S. Treasury decided that including this insurance
coverage
provides a current economic benefit to the participant. This economic benefit is taxable
as current
income. The economic benefit with disability insurance is the full premium that is paid.
The economic
benefit with life insurance is the term cost of the amount at risk (face amount less cash
value).
Typically the insurance company that underwrites the applicable policy computes the PS-58
cost for
each employee. This amount must be reported to the IRS. The employer is responsible to
report the
applicable income.
Question: I terminated my employment as of Jan. 1, 2000. I have well over $5,000
in my
former employer's 401(k). I was told last year by the plan administrator that I could
leave
my money in the plan. Now, a new administrator is telling me that I must withdraw my
money from the plan because the administrative costs are too high. What are the rules in
this situation?
TB: You're legally permitted to leave your money in the plan until retirement age if the
vested benefit
is at least $5,000. You can't be forced to take the money out in this instance despite the
administrative costs involved.
Question: My 401(k) plan allows transfers to IRAs even if I'm still enrolled in
the plan.
I'm 46 years old and wonder if there's an advantage in transferring company stock to an
IRA. I would like to sell it and get better diversity in my investments.
What's confusing is whether I'll have to pay capital gains tax on this deal or whether the
proceeds will be taxed as ordinary income. Should I consider this stock transfer versus
cash transfer at my age, or would this tax situation only apply if I were 59ý?
TB: It isn't legally permissible to make a withdrawal from a 401(k) plan prior to age 59ý
while
you're still employed, other than for a financial hardship. You mention that you're
considering
transferring the company stock to an IRA so you can diversify.
I'm assuming the company stock is held in an ESOP rather than the 401(k). Otherwise you
wouldn't
be legally permitted to transfer it to an IRA while you're still employed.
The special tax advantage that is applicable to employer stock is available only if you
receive a
distribution of the stock. The biggest advantage is realized by passing greatly
appreciated employer
stock to your heirs when you die. Hopefully that will be 30 to 40 years from now. If you
expect to
need the amount you have accumulated in employer stock to provide income during your
retirement
years, then passing money to your heirs is likely to be a very secondary issue at this
point.
If your primary objective is to build your retirement nest egg, then you should make your
decision
based upon your comfort with the company stock you own. Properly diversifying reduces risk
compared to owning only one stock. If this is your major goal, you should consider using a
transfer
to an IRA to diversify if your plan permits you to do so. However, you need to be able to
live with
the missed opportunity if your company stock becomes a big winner at some point in the
future.
Question: My company plan says that once I request a distribution, my plan is
valued and
no further interest will be paid. My funds are invested in an interest-income fund. What's
my best alternative?
TB: You don't indicate whether you are about to leave your company. If you aren't, then
the
administrative procedures for cashing out your account should have no bearing upon how you
invest
your money. You need to diversify your money among a number of the funds in your plan so
you
have a balance of stock and income-oriented funds that will give you a better chance of
accumulating an adequate retirement nest egg.
If you expect to leave the company in the near future, you should leave the money in an
interest fund
until you receive your distribution. Your plan probably is run on a balance-forward
recordkeeping
system. With this type of system, benefit payments are determined as of the latest
valuation date
rather than the day your money is withdrawn from the funds. This is legally permissible;
however,
most plans today are operated on real-time systems that determine benefit amounts by using
the
fund values on the day the shares are sold.
Question: Our company just changed retirement administrators. This change was
brought
on by request of the 35-member pilot's union.
The rest of the company isn't unionized. The 240 non-union workers weren't consulted. We
were just told that the plan hadn't done well and was being moved.
The plan was locked up on Dec. 23, 1999 so it could be closed and moved on Dec. 31,
1999. I called the new administrator on Feb. 14, 2000 and was told that it would be the
middle of March before the funds would be available. My questions are as follows:
1. Is this time frame within normal limits? 2. Is it proper that a group of 35 makes
decisions for the rest of us? 3. Should we as a group talk to the company and put them on
notice that any further changes in the plan must be with the wishes of the majority, not
just
the chosen 35? 4. The annual fee for pilots is $35; for non-pilots, it's $251. Is this out
of
line?
TB: The employer retains the responsibility and the authority to pick the organization
that will
manage the plan. This includes the authority to move the money from one provider to
another
without any input from participants. Of course, most employers consult their employee
participants
when they are making these decisions. The plan is for the benefit of participants, so it
makes sense
to listen to them within reason. This should include all participants and not just a
certain group. I
would inform the company that all employees should be consulted in the future when changes
are
being considered. Most companies that change providers either survey all participants or
form a
committee, which includes representatives from the different employee groups. However, you
must
accept the fact that, while input from participants frequently is considered, the ultimate
responsibility
is the employer's.
I don't know how you computed the fees for pilots versus non-pilots but if both groups are
covered
by the same plan, the fees must be determined in a uniform manner for all participants. If
the fees
you have described are solely administrative fees, $251.00 per participant is very high. I
am familiar
with your advisor and their fees are competitive with the industry so I would be very
surprised if you
are being charged $251.00 per participant for administrative services.
The transition period during which you are prevented from engaging in the normal
transactions is
referred to as the "blackout" period. The time frame you mentioned is within
industry norms;
however, many transfers are being completed within shorter time periods.
 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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