Ted's Table

TB: As you're aware, cash balance plans attracted much attention during 1999. The Congressional debate over these plans will continue into 2000. I expect some action from Congress this year. The minimum change I expect will be to require employers that change from a traditional pension to a cash balance plan in the future to disclose certain information to the employees. The most extreme action I expect will be to require that employees be given the option of retaining the old benefit or taking the new one. Any such changes are likely to impact only employers that make this type of change after the new legislation becomes effective. The effective date for the new rules may also go back to the time the legislation was first introduced in 1999.

Some employees who have been impacted by this type of change have filed suits claiming age discrimination. It will take a while for these suits to be resolved.

TB: If you die before distributions begin, your sons must withdraw the entire amount within five years of your death unless they take an annuity form of payment. If they take an annuitized form of payment, distributions must begin no later than one year after your death over a period not to exceed the life expectancy of the beneficiary. The annuity approach is legally possible but most 401(k)s require the benefit to be taken as a lump sum. You should check with the person who handles your former employer's plan to see whether an installment form of payment is possible.

In any event, the amount your sons receive will be taxable income. They won't be eligible to roll it tax-deferred into an IRA but these funds may enable them to increase their own tax-deferred savings.

Say one son contributes $4,000 to his 401(k) plan and gets from you a $10,000 a year distribution from your 401(k) plan. That's considered taxable income. But, he could decide to bump up the contribution to his retirement plan. He could, in turn, use the distribution to fill in for the deferred income.

You should know, before a lump sum or installments could be distributed, the estate has to be settled. The full amount of the 401(k) account will be included in the estate. There could be an estate tax liability. The estate's executor has to decide the source of money to pay for the estate tax. The retirement money might be used for that purpose. Once the estate has been settled, whatever is left from the 401(k) will be distributed to your sons as taxable income.

TB: I've told business owners for years that the only way not to have liability exposure is to not have a retirement plan. If you have a plan, you will have liability exposure regardless of how you structure your plan. Someone representing a particular financial organization may tell you that all you need to do is to pick his/her organization and you will cease to have any responsibility because his/her organization does every thing. Regardless of the approach you take, you're ultimately responsible for your decision. I've discussed this situation with a number of ERISA attorneys from different parts of the country. Some think the employer's liability is increased rather than reduced when employees are given the investment responsibility.

Individually directed accounts won't work as the sole option because some of the participants won't have enough money to access any funds due to minimum-balance requirements. It will also be difficult for those with smaller account balances to adequately diversify among the full range of funds. Individually directed accounts generally are viable options only for participants with account balances of $10,000 or more.

I need a lot more information to make recommendations that are applicable to your situation. Your best alternative probably is a combination of specific funds which employees access on a collective basis and an individually directed account which participants with sufficiently large account balances may access by paying a higher fee.

This approach is viable for larger, mature plans and for plans that cover primarily high-paid professionals. Otherwise, the best alternative to what you're doing is to select a limited number of funds and make them available to all participants. The funds must be selected considering solely what is in the best interest of the participants. The funds should be of high quality and should be monitored and replaced if performance is sub-par over an adequate period of time.

TB: Employers aren't required to permit partial distributions. In fact, most plans require lump sum distributions. You will need to withdraw your money as a lump sum if this is what the plan rules require. If you leave your job at age 55 or older, which you say you plan to do, you can withdraw your 401(k) funds without incurring the 10% penalty. For an IRA, however, the age limit is 59 1/2. So one strategy you could do would be to take part of your 401(k) as a cash distribution to sustain you until age 59½ and roll the rest directly into an IRA. Another option is to roll the entire amount into an IRA and to take an "annuitized" form of payment from the IRA, which will also allow you to avoid the 10% penalty if you fulfill the requirements.

TB: Your former spouse's employer will be required to establish a 401(k) account under its plan for your benefit. You will generally have the same rights with respect to this account as other participants have. Your access to this money may be limited while your former spouse is still employed. You will need to check with the employer to see what access you will have to the funds before you do anything.

Because you will be a single mom, I strongly recommend doing everything you can to preserve this money for your retirement. I recommend renting a home for at least a couple of years before you pursue buying a home. If you decide to buy at some point, I recommend buying a place which requires the lowest possible up-front money and using some of the 401(k) money only if there isn't any alternative. I also recommend buying the home and withdrawing whatever amount you must take from the 401(k) during the first part of the year so the tax benefits of home ownership will help you offset the taxes you will have to pay on the distribution.

TB: Federal law prohibits creditors from attaching 401(k) funds and it prohibits employees from using this money as collateral other than for a loan to you. State law in this respect governs IRAs, and not all states have passed laws protecting IRAs from creditors. There have been some instances where creditors have successfully attached IRA assets.

Your former employer may not attach your 401(k) funds but it can make it difficult for you to collect these funds if you have done something to damage the company or owe the company money. For example, assume you left your former employer and went into business for yourself in direct competition with your former employer. Further assume you solicited the clients of your former employer in direct violation of an employment contract. Your former employer may decide to hold your 401(k) money hostage to use as leverage to resolve the employment contract violation.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every week. 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.

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.

Ted's Table

TB: As you're aware, cash balance plans attracted much attention during 1999. The Congressional debate over these plans will continue into 2000. I expect some action from Congress this year. The minimum change I expect will be to require employers that change from a traditional pension to a cash balance plan in the future to disclose certain information to the employees. The most extreme action I expect will be to require that employees be given the option of retaining the old benefit or taking the new one. Any such changes are likely to impact only employers that make this type of change after the new legislation becomes effective. The effective date for the new rules may also go back to the time the legislation was first introduced in 1999.

Some employees who have been impacted by this type of change have filed suits claiming age discrimination. It will take a while for these suits to be resolved.

TB: If you die before distributions begin, your sons must withdraw the entire amount within five years of your death unless they take an annuity form of payment. If they take an annuitized form of payment, distributions must begin no later than one year after your death over a period not to exceed the life expectancy of the beneficiary. The annuity approach is legally possible but most 401(k)s require the benefit to be taken as a lump sum. You should check with the person who handles your former employer's plan to see whether an installment form of payment is possible.

In any event, the amount your sons receive will be taxable income. They won't be eligible to roll it tax-deferred into an IRA but these funds may enable them to increase their own tax-deferred savings.

Say one son contributes $4,000 to his 401(k) plan and gets from you a $10,000 a year distribution from your 401(k) plan. That's considered taxable income. But, he could decide to bump up the contribution to his retirement plan. He could, in turn, use the distribution to fill in for the deferred income.

You should know, before a lump sum or installments could be distributed, the estate has to be settled. The full amount of the 401(k) account will be included in the estate. There could be an estate tax liability. The estate's executor has to decide the source of money to pay for the estate tax. The retirement money might be used for that purpose. Once the estate has been settled, whatever is left from the 401(k) will be distributed to your sons as taxable income.

TB: I've told business owners for years that the only way not to have liability exposure is to not have a retirement plan. If you have a plan, you will have liability exposure regardless of how you structure your plan. Someone representing a particular financial organization may tell you that all you need to do is to pick his/her organization and you will cease to have any responsibility because his/her organization does every thing. Regardless of the approach you take, you're ultimately responsible for your decision. I've discussed this situation with a number of ERISA attorneys from different parts of the country. Some think the employer's liability is increased rather than reduced when employees are given the investment responsibility.

Individually directed accounts won't work as the sole option because some of the participants won't have enough money to access any funds due to minimum-balance requirements. It will also be difficult for those with smaller account balances to adequately diversify among the full range of funds. Individually directed accounts generally are viable options only for participants with account balances of $10,000 or more.

I need a lot more information to make recommendations that are applicable to your situation. Your best alternative probably is a combination of specific funds which employees access on a collective basis and an individually directed account which participants with sufficiently large account balances may access by paying a higher fee.

This approach is viable for larger, mature plans and for plans that cover primarily high-paid professionals. Otherwise, the best alternative to what you're doing is to select a limited number of funds and make them available to all participants. The funds must be selected considering solely what is in the best interest of the participants. The funds should be of high quality and should be monitored and replaced if performance is sub-par over an adequate period of time.

TB: Employers aren't required to permit partial distributions. In fact, most plans require lump sum distributions. You will need to withdraw your money as a lump sum if this is what the plan rules require. If you leave your job at age 55 or older, which you say you plan to do, you can withdraw your 401(k) funds without incurring the 10% penalty. For an IRA, however, the age limit is 59 1/2. So one strategy you could do would be to take part of your 401(k) as a cash distribution to sustain you until age 59½ and roll the rest directly into an IRA. Another option is to roll the entire amount into an IRA and to take an "annuitized" form of payment from the IRA, which will also allow you to avoid the 10% penalty if you fulfill the requirements.

TB: Your former spouse's employer will be required to establish a 401(k) account under its plan for your benefit. You will generally have the same rights with respect to this account as other participants have. Your access to this money may be limited while your former spouse is still employed. You will need to check with the employer to see what access you will have to the funds before you do anything.

Because you will be a single mom, I strongly recommend doing everything you can to preserve this money for your retirement. I recommend renting a home for at least a couple of years before you pursue buying a home. If you decide to buy at some point, I recommend buying a place which requires the lowest possible up-front money and using some of the 401(k) money only if there isn't any alternative. I also recommend buying the home and withdrawing whatever amount you must take from the 401(k) during the first part of the year so the tax benefits of home ownership will help you offset the taxes you will have to pay on the distribution.

TB: Federal law prohibits creditors from attaching 401(k) funds and it prohibits employees from using this money as collateral other than for a loan to you. State law in this respect governs IRAs, and not all states have passed laws protecting IRAs from creditors. There have been some instances where creditors have successfully attached IRA assets.

Your former employer may not attach your 401(k) funds but it can make it difficult for you to collect these funds if you have done something to damage the company or owe the company money. For example, assume you left your former employer and went into business for yourself in direct competition with your former employer. Further assume you solicited the clients of your former employer in direct violation of an employment contract. Your former employer may decide to hold your 401(k) money hostage to use as leverage to resolve the employment contract violation.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every week. 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.

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.