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Sprucing Up the 401(k)

With other retirement vehicles in dire shape, plan sponsors are rethinking their defined-contribution offerings.

David M. Katz, CFO Magazine
April 1, 2006

Sprucing up 401k plans

Outstanding article. You hit on 3 or 4 salient points that I've been harping on to plan sponsors for several years. Maybe your article will reinforce what I've been preaching and force a call to action. Keep up the good work! ESM

Posted by Scott Miller | June 12, 2006 10:34 am

401K Limits?

This is all well and good but what advice can you give me if my employer has a limit on contributions for those making more than 90K in 2004. This rule is preventing those making over this amount from saving up to the federal limit of 15,000. The reason sited is based in ERISA laws, however I know there are ways to create safeharbor plans that get around such restrictions. What other option do I have both internal and external to my company?

Posted by Joe Caltagirone | April 05, 2006 04:51 pm

Not There Yet

The article makes several good points about how to increase participation in 401(k) plans. Unfortunately, it also misses several ideas that could help employees both save adequately for retirement and manage their savings better. For example, it might be useful for companies to provide an interactive tool that allows participants to determine what percentage of their income they will need to save to meet an objective. The participant could input, % of final salary, assumed investment return prior to and after retirement, desired retirement age, assumed rate of inflation and assumed salary increases. The program would could then tell the participant what percentage of wages are needed to be deferred. Another idea is to allow participants to place their funds with professional money managers. Ideally, this would accomplish two objectives: getting disciplined knowledge management and reducing investment fees. Recent studies have shown that the rate of return on 401ks is less than that on traditional professionally managed pension plans and that fees are higher.

Posted by Gerald Cole | April 03, 2006 04:04 pm

Fixing the 401(k)

This is not rocket science. The employer must decide the purpose its 401(k) plan should serve. Is it a retirement plan? Is it a multipurpose tax-deferred compensation plan? Or, something else? The underlying assumption of your article and the hundreds just like it written every month is that a 401(k) plan is somehow, necessarily a retirement plan. While a 401(k) could be designed to serve as a retirement plan, very few are. Here's the easy way. All employees receive a substantial employer contribution. If the employer must, regular take home pay is reduced. The employees are permitted but not required to make 401(k) contributions. Employees are not permitted to decide how to invest their accounts. The plan's assets are invested in a reasonably balanced equity/debt fund. Benefits are not payable on account of hardship or for any other reason in-service. No participant loan program. Benefits are payable only at death, total and permanent disability, or at termination of employment at or after age 60. Benefits are paid in annual installments early in the calendar year in an amount determined by dividing the participant's year-end account balance by the appropriate expected return multiple from the IRS Sec. 72 regulations for the employee's life or the employee's and spouse's joint lives. On the other hand, if the employer does not want its 401(k) plan to be a retirement plan, then make it as flexible as possible. Forget about education. That's what school is for. If employees want to use their accounts to play the investment lottery, let them. Education and advice programs! Why? To line the pockets of those providing education and advice?

Posted by Carl Johnson | April 03, 2006 02:50 pm

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