Before I get to this week's column, I want to respond to some reader feedback. My answer to a question two weeks ago about a wrap fee on a 401(k) plan proposed by an insurance company to a small business prompted several inquiries from readers who felt my answer was unfair to insurance companies. Here are two representative questions, followed by my response.

Also, if an insurance company has a wrap fee of 1 percent, isn't it worth paying if the investments in the 401(k) are far superior in returns compared to the competition?

TB: My comments were in response to the specific situation of a small employer (21 employees), and to that employer's question about a product with a wrap fee. The writer was also looking for providers who offer multi-fund products that do not have a wrap fee. I gave the reader several suggestions that fit the specific facts of his situation. My comments were not intended to go beyond this specific situation, and I did not intend for my comments to be an unqualified, broad-based endorsement or criticism of any company.

One of the readers pointed out that not all insurance company products have wrap fees. I agree — many of the 401(k) products offered by insurance companies in the $5 million to $100 million market are very competitive and I recommend them. The total fee packages (direct-billed fees and asset-based fees) of these products are in line with those of other providers and they don't include wrap fees or back-end surrender charges.

This gets me back to the major issue in this instance, which is the products offered to the smaller employer market. My advice to employers in this category is to make sure they know what they are buying and to avoid products that have substantial back-end surrender charges (5 percent to 7 percent of plan assets). My experience has shown that many employers who buy these products want to get out of them within a few years for a variety of reasons. The surrender charge becomes a major barrier. There are other products available to small employers that may not be perfect but they do not have surrender penalties. To the best of my knowledge, the back-end surrender charge is an intricate part of these contracts and cannot be waived by telling the agent to do so.

Other products offered by insurance companies to the smaller market do not have a back-end surrender charge but may have a higher asset-based fee. The pricing of these products is usually flexible so they can be sold through a variety of distribution channels including commissioned sales persons. And, the pricing of these products generally can be influenced by the level of compensation that is paid to the sales person.

I have provided support to the Department of Labor at various times on the fee issue. My position has been that all fees that are paid by either the plan sponsor or participants should be voluntarily disclosed by the provider. This disclosure should include fees that are billed and those that are deducted from plan assets including the fund management fees and any wrap fees. I have also recommended that those paying the fees should know who ultimately receives them so they will be able to evaluate value received relative to the services provided. This includes the compensation of the broker/consultant. I have also stated that the pricing of higher-cost products may not be unreasonable. I have recommended this type of product in instances whether the broker/consultant provides a high level of hands-on support to participants. The key is value relative to cost.

Investing for retirement is a serious business with fiduciary standards that are set by law. Plan sponsors and participants who are making these important decisions should be given all applicable information about the products they are considering so they can make informed decisions.

Question: My company matches my 401(k) contributions at a rate of 50 cents on the dollar this year. I had hit the limit of $10,500 by September. I just read in a financial magazine that I may be leaving some of the company's matching funds on the table since, according to the article, the company will spread its match over the whole year. The article said "not to max out the contributions before getting the full employer match." Is this right, did I leave money on the table?

TB:Yes, you may have left money on the table. The matching contribution is limited with most 401(k)s. For example, your employer may match only the first 6 percent of pay that you contribute. Any contributions in excess of this amount are not matched. Assume you earn $2,000 per pay period and you contribute 15 percent in order to reach the $10,500 limit as early as possible. Your employer will match only the first 6 percent of pay that you contribute. The amount matched in this example would be 6 percent of $2,000 or $120.00 each pay period. The actual matching contribution would be $60.00 since the matching rate is 50 percent.

Many employers match only when employees are actually contributing. Other employers compute the matching contribution on an annual basis regardless of when the employee actually makes the contributions during the year. For example, if your employer were to compute the match in this manner, you would continue to receive matching contributions even though you were no longer contributing. The match would be equal to 3 percent of the pay you receive each pay period so that the employer contribution would equal 3 percent of your pay for the entire year by the end of the year. If your annual contributions equal at least 6 percent of your annual pay, you should receive matching contributions equal to 3 percent of your pay.

Many employers match only during periods when employees are actually contributing because this is easier administratively; however, this method of computing the matching contribution may not agree with the plan document. Employees who contribute the full amount eligible to be matched should receive the full matching contribution regardless of when the employee makes his contributions during the year, unless the plan document provides otherwise.

You should structure your contributions so you will be contributing during the entire year if your employer matches only the amount that is contributed each pay period. Otherwise you will be leaving money on the table during the period between the date you hit the maximum and the end of the year.

Question: My sister-in-law's employer just converted from a for profit corporation to a nonprofit company and converted its retirement plan from a 401(k) to a 403(b). She was told that she could not roll her 401(k) over into the 403(b). Her current 401(k) total value is over $8,000. Could she roll the $8,000 over into a Roth IRA to cover a period of four years (i.e., $2,000 per year for four years)?

TB: I recommend leaving the money in the 401(k) plan at this time because the law is likely to be changed this year or next permitting transfers from 401(k) plans to 403(b)s. The fact that this type of transfer isn't currently permitted is probably why your employer didn't transfer the money from the 401(k) to the 403(b) when its status changed. By the way, since your sister-in-law is still an active employee of the same employer, she will not be permitted to withdraw the money from the 401(k) without penalty until she leaves the employer or attains age 59ý, unless there has been an ownership change of her employer that would permit a distribution of 401(k) assets.

On the whole, I do not recommend rolling pretaxed money into a Roth IRA because there isn't any economic advantage unless your sister-in-law expects to be in a higher tax bracket after she retires. (You cannot roll a 401(k) directly into a Roth IRA. You can roll it into a traditional IRA, then convert that to a Roth IRA if you qualify, but that means paying taxes up front on the amount you convert.) The net amount left after paying taxes will produce the same net distribution from the Roth IRA after she retires if her tax bracket is the same at the time of distribution as it is now. She will have less with the Roth IRA if she is in a lower tax bracket when she takes the money out.

Question: In the statements for our previous 401(k) there is an employee contribution and an employer contribution. If I'm not fully vested and I leave the company, what happens to the employer contribution?

TB: Employee contributions are always fully vested. The portion of the employer contribution that is forfeited by an employee who leaves the company may be used toward future employer contributions to other employees, be reallocated to the remaining active participants, or be used to pay administrative expenses. Each employer selects one of these permissible alternatives when it establishes the plan. The summary plan description you received when you joined the plan should indicate which alternative your employer selected. If you don't have one, ask the employer's human resources representative what happens to forfeitures.

Question: I was laid off from a company about 10 years ago and took my 401(k) money, rolling it over into several IRA funds. When I found another job, I began to contribute into my new company's 401(k). I have now left that company and have not yet cashed out. If and when I do decide to cash out, can I put that money into my existing IRA, or must I keep it separate?

TB: You can have the money transferred into one or more of your existing IRAs. You should have the money transferred directly from the plan into your IRA in order to avoid the mandatory 20 percent tax withholding. The only reason it is necessary to have more than one IRA is to keep money rolled over from an employer plan separated from your regular IRA contributions. You lose the opportunity to transfer the IRA rollover money into another employer plan when it is mixed with IRA contributions.

My company gives me a 60-cent match for each dollar that I contribute into my 401(k) plan up to 10 percent of my salary (roughly $60,000).

I can also put up to 15 percent of my after-tax salary into the 401(k) for a total contribution of 25 percent. Should I continue to put 25 percent of my salary into the 401(k) even if it means that I would lose out on some of the company match, or should I take the maximum company match and stash the difference in my Roth IRA (which I currently also max out)?

And finally, how do I do the math to determine what percentage I can contribute (up to the 10 percent I talked about earlier) in order to receive the maximum company match?

TB: There isn't any reason why you should contribute 25 percent and lose the matching employer contribution. The combined employer/employee contributions may not exceed 25 percent of your pay. You will lose 6 percent of your pay ($3,600) if you contribute 25 percent because the employer will not be permitted to make a contribution.

You should contribute the maximum amount pretax, which would be 17.5 percent of pay. This percentage will enable you to reach the $10,500 maximum if you earn $60,000. If your employer doesn't permit this high of a percentage to be contributed pretax, you should ask your employer to change the plan, because there isn't any reason to limit you to less than the legally permissible maximum. This will enable you to receive the 6 percent employer match.

You could contribute an additional 1.5 percent after-tax to hit the 25 percent combined maximum. Putting the additional amount into a Roth IRA, up to the limit, is a better alternative. You do not get any tax break up front with either. The investment earnings are not taxed during the accumulation period in either instance; however, the untaxed investment gains are taxable when they come out of the 401(k) compared with no tax when they come out of the Roth IRA.

Note: See the above question on employer-matching contributions. You should reduce your maximum pretax contribution to less than 17.5 percent if you earn more than $60,000 and if your employer matches only during pay periods when you are making pretax contributions. For example, if you earn $65,000, you will be able to make pretax contributions for the entire year if you limit your pretax contributions to 16.15 percent of your pay.

I recently left the company I worked for with a 401(k) balance of $6,000. Should I roll the money into my new employer's program, which I am not able to get into for another 8 months, or should I set up an IRA?

TB: Transferring the money directly into an IRA will give you more flexibility than transferring the money into your new 401(k) when you become eligible. Transferring it into your new 401(k) is a reasonable alternative if you are satisfied with the investments that are available through the plan and if you prefer having your retirement money in one place. In either instance, have the money transferred directly rather than being distributed to you. This will enable you to avoid the 20 percent mandatory tax withholding.

You are legally permitted to leave the money in your old plan until you are eligible to join the new plan. You are also permitted to transfer the money into an IRA now and into the new 401(k) when you are eligible. In this instance, the money must be invested into an IRA to which you have not made any IRA contributions (sometimes known as a "conduit IRA") if you want to transfer it into the new 401(k) plan later.

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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