| Ted's Table |
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August 28, 2001
What are the IRS/ERISA rules concerning the vesting of my 401(k) match if I worked intermittently for one company? ... My son's previous employer rehired him. The company no longer offers the 401(k) plan he contributed to (and left his money in). Can he withdraw his money now? ... I am considering switching our 401(k) plan to institutional funds to reduce fees. Is this a good idea? ... I have private company stock in the 401(k) at my old employer; can I roll that to my new employer's plan?
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Q: What are the IRS or ERISA rules concerning the
vesting of 401(k) matching contributions if I worked off and on for a company over a
number of years? I worked for a company for two years, left for 1.75 years and am now
re-employed with them. The first two years of service that I have with the firm should
count toward my vesting into their 401(k) and profit-sharing plan, if they allow it,
right? Are there any IRS or ERISA (or other) rules that would preclude this?
TB: I have good news for you; there are ERISA rules
that require counting prior service in situations such as yours. These rules will have a
two-fold impact on your situation. The first applies to the vesting of employer
contributions following your re-employment. Your employer must count your prior service
after you have completed a year of service, as defined in the plan document, following
your re-employment. Your vesting with respect to these contributions will be determined
thereafter by combining your total years of service for the two periods of employment. The
two prior years must be added to the additional years you earn during your second period
of employment.
You will also benefit from newly enacted rules that take
effect next year. They require 100 percent vesting after three years in the case of a
cliff vesting schedule, or six years in the case of a graded vesting schedule.
The ERISA rules also impact any employer contributions that
were forfeited if you received a distribution after you terminated. You have the right to
return the amount that was distributed. Your employer is required to restore the
contributions that were forfeited if you do this. The combined service will also be used
to determine your future vesting of these employer contributions. The prior employer
contributions must also be restored to your account if you left your money in the plan.
Q: My son quit his job and then was re-hired by the same
company. The company no longer offers the 401(k) plan he contributed to the first time
around, and has withdrawn its matching money. My son wishes to withdraw his money ($600)
and was told he couldn't unless it was a hardship. Is that correct?
TB: It is necessary for me to make certain
assumptions in order to answer your questions. These are as follows:
- Your son left his money in the plan after he left the
company.
- The employer took back the non-vested contributions during
the period when your son wasn't an employee.
- The employer froze the plan so that neither employee nor
employer contributions were possible after your son returned.
Withdrawals during active employment prior to age 59ý are
permitted only for IRS-approved hardships. Your son could have withdrawn the money and
done whatever he wanted with it during the period when he wasn't an employee of this
company. He lost this opportunity when he returned to work there. He is now an active
employee. As a result, his money must stay in the plan until he terminates, has a hardship
which complies with the IRS rules or reaches age 59ý.
Q: My question concerns fees. Recently, I have been
complaining about the excessive asset-based fees (administrative and other) imposed on our
401(k) plan participants and have received some reduction of fees by our third-party
administrator. But, I also want to know about the fees charged by the investment funds.
From the perspective of fees, what are the pros and cons
of investing in "retail funds" or "institutional funds"? It is my
understanding that the institutional funds come with lower fees than the retail funds that
we are currently using. Would our plan participants benefit by switching to the
institutional funds? One plan participant is concerned that he won't be able to track the
performance of the institutional funds as easily as that of the retail funds. Is this
true?
I personally believe the reduction in fees (more than
0.5 percent) which I can get with the institutional funds to be of greater concern. Do you
agree?
TB: There are many factors that should be considered
when investing. Fees are one, but performance is also very important. Other factors
include the level of diversification that is available, the style consistency of the
manager, the risk-weighted return compared to appropriate benchmarks, and satisfying your
employees, if that is possible.
If you can shave 0.5 percent off the fees by switching to
institutional funds, that is a big deal over the long run, everything else being equal.
Let's talk a minute about the differences between
institutional and retail funds. Institutional fund managers are normally hired for their
specific investment style, which they are required to follow. Retail fund managers
generally operate with a much greater level of freedom. Access to information is a valid
concern for participants. This can be more difficult with institutional funds because they
aren't reported in the financial newspapers; however, the daily prices and other
information should be available through your provider. Institutionally managed funds may
be less expensive than actively managed retail funds, but you really need to dig into all
the relevant facts involved.
You should be able to structure your plan to offer both
rather than making it an either-or decision. Another possibility is to make the
institutional funds the primary funds and to also offer a brokerage window, which will
enable those who want to pick their own funds to do so.
Q: I left my job in September 2000. I opted to leave my
401(k) money with my former employer. This company is privately owned but has just filed
with SEC to go public. Since the company's contributions to my 401(k) were in stock, will
their filing to go public be good for me? If not, I am now in a position where I can roll
it over into my new employers 401(k) plan. What would you advise?
TB: Your new employer isn't likely to let you
transfer the stock of your former employer into its plan. If you want to make a transfer,
you will probably have to sell the stock so you can make a cash transfer.
If I am correct, there two issues you need to consider. The
first is whether you are willing to leave your 401(k) money parked in the old employer's
plan so you can retain the stock. The second issue is the one you raise about the
advisability of retaining your former employer's stock as an investment. Stock in a
privately held company that is held in a retirement plan must be valued at least annually
by an independent firm. These stock values tend to be a bit conservative compared to how
the public values stock. For example, the firm that does the valuation usually discounts
the value because the stock isn't publicly traded and because the plan holds a minority
interest.
The stock value will be enhanced if the company goes public
but the fact that your former employer has filed with SEC doesn't guarantee that the
company will in fact go public. This decision will be made probably within the next six
months. Factors that will influence this decision are the general market for IPOs and how
well the company does in the interim. Your major risks are:
- the market to go public won't be good when SEC gives its
approval,
- the company is unable to meet its performance benchmarks due
to the current economic slump or some other reason,
- the company is spending a lot of money getting ready to go
public.
The stock value will likely drop if one or more of these
things occur.
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.
 Read Ted Benna's Biography
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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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