Question: What kind of a contribution is it when my company contributes up to 3.5 percent of my annual earnings at the end of each year? Is this considered a company matching contribution? If so, would you consider it a good benefit? Or, would a company match of $0.50 of each $1.00 I contribute be a better benefit?

TB: A 3.5 percent employer contribution is better than a $0.50 match because all eligible employees get the 3.5 percent contribution, including those who do not contribute. Typically about 85 percent of eligible employees contribute when the employer-matching rate is $.50 per $1.00 of employee contributions. The 15 percent who do not contribute do not receive any benefits. These employees will receive the 3.5 percent employer contribution to your plan. Your plan design is better for employees who decide not to contribute to the plan, without penalizing those who do contribute. Employees who contribute 6 percent of pay with a 50 percent employer match will receive 3 percent of pay, which is less than the 3.5 percent employer contribution.

There is one potential downside to this design. A lower percentage of nonhighly paid employees are likely to contribute because they do not have to do so to get the 3.5 percent employer contribution. This will result in smaller retirement nest eggs for these employees. In addition, the amount that the highly compensated employees may contribute will be adversely impacted by the reduced level of participation from the lower-paid employees.

By the way, there are a number of names that are used to describe this type of employer contribution, including: automatic, discretionary, profit-sharing, basic, fixed, and pension.

Question: I owe the IRS money and am on a monthly payment plan with them. However, I am concerned because I have a 401(k) with a company that I left in August. Can the IRS take the money if they find out about it? Should I roll it over to an IRA now or I wait until my new company offers the 401(k) option and then roll the money directly into that plan?

TB: Getting behind on your federal taxes is a big problem. The IRS is tough but they will work with you if you fulfill your commitment for paying the back taxes. A former business acquaintance of mine went to prison because he defaulted on his agreement for paying back taxes, so don't mess with these guys. I recommend getting the back taxes paid even if you have to use your retirement savings to do so. The IRS will not go away — you still have to pay the taxes even if you declare bankruptcy.

A 401(k) currently provides somewhat greater protection from creditors than an IRA, so I would recommend keeping your money in a 401(k) plan rather than an IRA. Your retirement savings are secure as long as you are making the monthly payments per your agreement with the IRS.

Protections for IRAs vary from state to state. I suggest you talk with an attorney so you fully understand your options.

Question: Do employers get a percentage or commission fee for the money that the employees have taken out of their salary for their 401(k)? Can employers borrow from employees' 401(k) money?

TB: The cost of administering the plan may legally be passed on to the participants to pay; however, these expenses must be reasonable. Normally, these expenses are paid by asset-based fees that reduce the investment return participants receive. For example, if you have a $10,000 account balance and your plan uses retail mutual funds, you are probably paying about 1 percent or $100 per year for investment and administrative services. It is legally permissible to charge an up-front administrative fee that is deducted from contributions before they are invested in the plan but this is unusual. The administrative fees are paid to the organization that manages your 401(k) plan — not your employer.

Some plans at smaller companies also select investment arrangements in which a commission is paid to the individual who helps sell and install the plan. This commission is paid to the sales representative — not your employer. Smaller companies with plans that have less than $10 million in assets usually pay the plan administrative fees. It costs these companies money to offer their employees a 401(k) even when there aren't any employer contributions.

Employers with plans that have $10 million or more of assets typically do not pay any administrative fees when the money is invested into retail mutual funds. Some very large companies actually receive compensation from the fund companies when money is invested in retail mutual funds. For example, an employer that has more than $100 million invested in retail mutual funds may receive 25 percent of the investment management fee from the fund company to help pay for the cost of running the plan. This practice exists only at very large companies that use retail mutual funds.

If you are confused at this point, I am not surprised because there are many fee arrangements, which makes it difficult for participants to know exactly what is happening. Employers paid all the noninvestment fees in the early days of 401(k) and I strongly believe these plans would be greatly improved by returning to this model. Separating investment and noninvestment services and fees will make it much easier for participants to understand the cost of investing and to seek less expensive alternatives.

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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