By: Ted Benna   Creator of the first 401(k) plan

April 18, 2002 This Week, Ted Tackles: My employer is thinking about switching the 401(k) plan to another company. Will I have to sell my investments? ý What are my rights concerning getting information from my employer about the investments it manages in my 401(k) plan? ý I participated in my 401(k) plan in 2001; can I make an IRA contribution, too? ý When are employer contributions to my 401(k) plan due?

Q: My employer is thinking about switching our 401(k) plan to another company. If this happens, do I have to sell all my current mutual funds or would I be able to transfer them to the new company?

TB: The answer depends upon the type of provider your employer selects and the size of the plan.

If your employer selects a large provider, the provider typically will require that you use only its funds. But, large providers are more flexible on this requirement for plans with lots of assets ($50 million or more).

If the plan has fewer assets and/or selects what is known as a bundled provider, you will probably be forced to sell all your current funds. A bundled provider is one that performs all the necessary investment and administration jobs to run a plan. Typically in this situation all existing funds must be sold and the money reinvested in funds that are offered by the new provider.

Alternatively, your employer might pick a third-party administrator to run the plan and that firm will permit any funds to be selected for the plan, including the existing ones. This is an option employers consider if the present funds are okay but other services such as participant recordkeeping aren't satisfactory.

Q: I have asked my employer three times to give me list of the investments that are held in my 401(k) mutual fund. Every time, my employer has declined, stating: "we trade securities so often that the list would be out of date when we gave it to you and we do not give out incorrect information knowingly."

What are my rights to know what securities my employer is investing in, in specific mutual funds that I have my 401(k) invested in? My employer manages the mutual funds.

TB: Since your employer is managing the investments, it isn't required to provide a list of the specific places where the money is invested. My hunch is that the money probably is invested in individual stocks rather than mutual funds, which is why the list changes frequently.

I recently met with the CFO of a company who ran the 401(k) plan this way. The plan had 625 participants and over $30 million of assets. The company hired one of the name-brand mutual fund companies to run a portfolio of stocks as the plan's investment rather than using retail mutual funds. The cost of running the plan was substantially less than with managed retail mutual funds. The CFO told me running the plan in this manner also eliminated the need to educate employees how to pick their own investments.

Your two major concerns should be:

1. who is picking the investments -- a couple of company executives or a professional investment manager? -- and,
2. the investment return the plan has experienced.

Your employer should be willing to provide both pieces of information. I would be uncomfortable if executives at your company are picking the specific investments, unless these individuals have the qualifications and experience needed to manage money.

Your employer should also be able to give you general information about the types of investments that are being made, for example the percentage that is typically invested in stocks and the type of stocks that are selected.

Again, any unwillingness to share this general information would make me very uncomfortable.

Q: In 2001 I participated fully in the company 401(k) program, which began operating in May 2001. Since the plan year was short I was wondering if I could also make a contribution to a traditional IRA this year (and what the restrictions are for future years)?

TB: Several factors impact your ability to make a tax-deductible IRA contribution: first whether you are a participant in an employer-sponsored plan, and second whether your adjusted gross income (AGI) and modified adjusted gross income (MAGI) exceeds the IRS' income limits for making a tax-deductible contribution. In other words, you may be able to make a tax-deductible contribution to an IRA, if you participate in the plan at work and your income is below the IRS limits. The fact that your plan year was short doesn't have any effect -- even if you contributed just one dollar to a 401(k) plan on the last day of the year, you would be considered to have been a participant in the 401(k) plan for the whole calendar year.

If you are not eligible to make deductible IRA contributions, consider opening a Roth IRA. A Roth is funded with after-tax dollars, but your earnings grow tax-free and contributions and earnings are tax-free on withdrawal, in retirement. The IRS also has income limits restricting Roth IRA eligibility. If you can't make a Roth contribution, you can always make a nondeductible contribution to a traditional IRA. (Your money grows tax-deferred, but you owe income tax when you withdraw it.)

The following charts show the limit breakdowns.

Here are the 2002 break points for making tax-deductible traditional IRA contributions.

Notes: *You are entitled to the full deduction if you did not live with your spouse at any time during the year. **If you did not live with your spouse at any time during the year, your filing status is considered, for this purpose, as single (therefore your IRA deduction is determined by the "single" criteria).

Finally, here are the Roth IRA eligibility break points.

The IRS has released a schedule showing the traditional IRA income break points through 2007. I don't have the space to provide that information, but you can find it on this site in the Frequently Asked Questions section covering IRAs. Look in the "Eligibility" section of Traditional IRAs.

Q: When are employer contributions to my 401(k) plan due? As of March 31, 2002, my statements have not shown the employer match, which is 5 percent of my gross income.

TB: Employer contributions must be made by the date the employer files its tax return for the applicable fiscal year. I will assume the fiscal year for your employer is the calendar year. In this instance, the employer was required to file its tax return by March 15, 2002 for the 2001 fiscal year unless an extension was obtained for filing the tax return.

By obtaining an extension, your employer can extend the filing deadline until Sept. 15, 2002. It is easy for businesses to obtain filing extensions and many do so. If your employer has obtained a filing extension, it doesn't have to make the contribution for 2001 until the day it files its return, which could be as late as Sept. 15, 2002.

I recommend asking someone at your company when they plan to make the contribution. Check the response you get to see if it tracks with the above.

Ted Benna, creator of the first 401(k) retirement savings plan, answers intriguing questions twice a month. With over 40 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored three books, Helping Employees Achieve Retirement Income Security, Escaping the Coming Retirement Crisis, and Tips for Successfully Managing Your 401(k), 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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