Ted's Table

TB: The IRS has just announced that the maximum pre-tax contribution for 401(k)s will rise to $10,500 next year.

The tax reduction bill that was vetoed by President Clinton (last month) included a provision that would increase the maximum 401(k) contribution to $15,000. There are also attempts underway to remove the 25% maximum compensation limit.

Both of these changes have broad-based support; therefore, the prospects for passage are good. The key is to get these changes attached to a bill that will be passed. The best possibility at this time is the minimum wage bill, which could be enacted during this session of Congress.

TB: TB: The problem here is the fact that our government, in an attempt to protect the rights of the spouse, passed into law a provision which provides that the spouse will automatically be the beneficiary, regardless of the paperwork that is filed by a 401(k) participant, unless the spouse agrees to the naming of someone else as the beneficiary.

This situation can create many problems. For example, a single mom names her children as the beneficiary. She subsequently remarries. Her new spouse automatically becomes her beneficiary regardless of the fact that the paperwork on file with her employer names her children.

The law passed by Congress overrides her wishes. The only way she can avoid this situation is to file a new beneficiary form after she remarries, naming the children as her beneficiary. However, this new beneficiary designation will be valid only if the new spouse signs a waiver giving up his right to this benefit. If he refuses to do so, there isn't anything the mother can do. By the way, having the spouse sign a pre-nuptial agreement giving up this benefit prior to marriage may not be legally binding because the spouse must give the waiver. The individual involved isn't the spouse until the marriage occurs.

Likewise, a 401(k) participant whose marriage is on the rocks isn't permitted to change his or her beneficiary without the spouse's consent. Your question: "is there any way to make sure your plan assets actually go to whom you intend?"

If you aren't married, your plan assets will be paid to the person you designate.

If you are married, the plan assets will pass automatically to your spouse. That's regardless of your wishes, unless you have submitted to your plan administrator a beneficiary form naming someone else as your beneficiary, and your spouse has signed this form waiving his or her rights to receive this benefit.

Bottom line: as soon as your marital status changes, file a new beneficiary form with your plan administrator including the special waiver, if applicable.

TB: You're correct that both the fund managers and the insurance company receive asset-based fees. Whether these fees are "excessive" depends upon the structure. In the worst case, regular retail mutual funds are used with their standard fund management fees. The insurance company then adds its fee on top which can be as much as an additional 1% to 1.5%. This additional fee reduces your investment return.

In the best situations, the insurance company uses funds with lower, institutional investment management fees and then adds a 0.25% to 0.5% fee on top. In this instance, the combined fees are competitive with managed, retail mutual funds. The insurance company can also add value by monitoring the managers and replacing those that vary from the specified management style and/or consistently underperform.

So, the fact that you are in a plan using a group annuity doesn't mean the fees are unnecessarily high. However, if the one your plan uses adds 1% to 1.5% on top of the standard retail fund management fee, you should inform the person at your company who oversees your plan that there are better alternatives which your employer should consider.

You may want to get your employer the Department of Labor's booklet about fees. You should also give your employer any articles you see in newspapers and financial publications on this subject. The top executives at your company probably have more money in the plan than anyone else. Once they're made aware of the significance of fees, they should be ready to consider alternatives.

TB: There are many different types of "tax-qualified" retirement plans. Because these plans provide special tax breaks, policy makers are constantly concerned about the size of the break that the top-paid employees receive. As a result, it's usually impossible to establish a qualified plan that adequately takes care of the needs of the top employees.

Most larger employers work around the restrictions of qualified plans by offering their top employees various forms of non-qualified plans. Employers use consultants who are familiar with both types of plans to help them determine what's the best mix of plans.

TB: You should be able to transfer your profit-sharing account directly into the 401(k) plan. Legally, this is permissible and your employer should encourage you and the other employees to do this. In fact, the employer could automatically transfer each employee's profit-sharing account into the 401(k) without giving employees any other alternative. It will ultimately be up to your employer to decide exactly how this situation will be handled.

TB: You indicate that your former employer was fined by the NASD and the SEC for improper enrollment of its employees. I'm a bit puzzled because this isn't a matter that would normally come under the jurisdiction of the NASD and SEC. The IRS and Dept. of Labor are the agencies that should be involved with such a matter.

Apparently, some of the 401(k) contributions weren't deposited into the plan. The proper corrective action is for your former employer to deposit these amounts with an appropriate rate of investment return. The investment return must be computed using the plan's actual return, but your former employer has some latitude in making this computation.

Regarding your distribution, you should file a written claim with the Plan Administrator requesting payment of your benefit if you haven't already done so. I recommend waiting to see what happens during this process with the IRS and DOL. You could hire an attorney to take legal action, but the situation is likely to be resolved just as quickly without taking this step.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Monday. 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: The IRS has just announced that the maximum pre-tax contribution for 401(k)s will rise to $10,500 next year.

The tax reduction bill that was vetoed by President Clinton (last month) included a provision that would increase the maximum 401(k) contribution to $15,000. There are also attempts underway to remove the 25% maximum compensation limit.

Both of these changes have broad-based support; therefore, the prospects for passage are good. The key is to get these changes attached to a bill that will be passed. The best possibility at this time is the minimum wage bill, which could be enacted during this session of Congress.

TB: TB: The problem here is the fact that our government, in an attempt to protect the rights of the spouse, passed into law a provision which provides that the spouse will automatically be the beneficiary, regardless of the paperwork that is filed by a 401(k) participant, unless the spouse agrees to the naming of someone else as the beneficiary.

This situation can create many problems. For example, a single mom names her children as the beneficiary. She subsequently remarries. Her new spouse automatically becomes her beneficiary regardless of the fact that the paperwork on file with her employer names her children.

The law passed by Congress overrides her wishes. The only way she can avoid this situation is to file a new beneficiary form after she remarries, naming the children as her beneficiary. However, this new beneficiary designation will be valid only if the new spouse signs a waiver giving up his right to this benefit. If he refuses to do so, there isn't anything the mother can do. By the way, having the spouse sign a pre-nuptial agreement giving up this benefit prior to marriage may not be legally binding because the spouse must give the waiver. The individual involved isn't the spouse until the marriage occurs.

Likewise, a 401(k) participant whose marriage is on the rocks isn't permitted to change his or her beneficiary without the spouse's consent. Your question: "is there any way to make sure your plan assets actually go to whom you intend?"

If you aren't married, your plan assets will be paid to the person you designate.

If you are married, the plan assets will pass automatically to your spouse. That's regardless of your wishes, unless you have submitted to your plan administrator a beneficiary form naming someone else as your beneficiary, and your spouse has signed this form waiving his or her rights to receive this benefit.

Bottom line: as soon as your marital status changes, file a new beneficiary form with your plan administrator including the special waiver, if applicable.

TB: You're correct that both the fund managers and the insurance company receive asset-based fees. Whether these fees are "excessive" depends upon the structure. In the worst case, regular retail mutual funds are used with their standard fund management fees. The insurance company then adds its fee on top which can be as much as an additional 1% to 1.5%. This additional fee reduces your investment return.

In the best situations, the insurance company uses funds with lower, institutional investment management fees and then adds a 0.25% to 0.5% fee on top. In this instance, the combined fees are competitive with managed, retail mutual funds. The insurance company can also add value by monitoring the managers and replacing those that vary from the specified management style and/or consistently underperform.

So, the fact that you are in a plan using a group annuity doesn't mean the fees are unnecessarily high. However, if the one your plan uses adds 1% to 1.5% on top of the standard retail fund management fee, you should inform the person at your company who oversees your plan that there are better alternatives which your employer should consider.

You may want to get your employer the Department of Labor's booklet about fees. You should also give your employer any articles you see in newspapers and financial publications on this subject. The top executives at your company probably have more money in the plan than anyone else. Once they're made aware of the significance of fees, they should be ready to consider alternatives.

TB: There are many different types of "tax-qualified" retirement plans. Because these plans provide special tax breaks, policy makers are constantly concerned about the size of the break that the top-paid employees receive. As a result, it's usually impossible to establish a qualified plan that adequately takes care of the needs of the top employees.

Most larger employers work around the restrictions of qualified plans by offering their top employees various forms of non-qualified plans. Employers use consultants who are familiar with both types of plans to help them determine what's the best mix of plans.

TB: You should be able to transfer your profit-sharing account directly into the 401(k) plan. Legally, this is permissible and your employer should encourage you and the other employees to do this. In fact, the employer could automatically transfer each employee's profit-sharing account into the 401(k) without giving employees any other alternative. It will ultimately be up to your employer to decide exactly how this situation will be handled.

TB: You indicate that your former employer was fined by the NASD and the SEC for improper enrollment of its employees. I'm a bit puzzled because this isn't a matter that would normally come under the jurisdiction of the NASD and SEC. The IRS and Dept. of Labor are the agencies that should be involved with such a matter.

Apparently, some of the 401(k) contributions weren't deposited into the plan. The proper corrective action is for your former employer to deposit these amounts with an appropriate rate of investment return. The investment return must be computed using the plan's actual return, but your former employer has some latitude in making this computation.

Regarding your distribution, you should file a written claim with the Plan Administrator requesting payment of your benefit if you haven't already done so. I recommend waiting to see what happens during this process with the IRS and DOL. You could hire an attorney to take legal action, but the situation is likely to be resolved just as quickly without taking this step.

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