Ted's Table

TB: Starting to build your retirement nest egg at age 23 is a really big plus. Do everything you can to avoid the temptation to use it for non-retirement purposes. Having this money compound for forty years or more will really pay off. The ideal percentage to put into the 401(k) plan at this stage is the amount that's matched by your employer. For example, if your employer matches the first 6% of your pay that you contribute, put this amount into the plan. If the employer doesn't match any of your contributions, I recommend contributing 6% to the plan. Additionally, you should build some savings outside the plan for emergency purposes and for larger purchases such as a home, car, etc.

TB: Each employer is free to design its 401(k) plan the way it wants, as long as the plan satisfies the legal requirements imposed by the IRS. Regarding loans, employers may not permit participants to borrow more than the maximum amount permitted by the IRS but they are permitted to impose more restrictive limits. In fact, many employers don't permit any loans due to their administrative complexity. The way your employer is administering your plan's loan provision is unusual to me but it's legally permissible.

TB: When one business buys another business, the new owner has complete authority to determine what happens to the retirement plan of the company it purchased unless the purchase agreement limits their authority. The most common practice when one business buys another business is to transfer the assets from one 401(k) plan to the other. However, the purchasing company may also decide to keep the old 401(k) plan going. This is what your new employer has decided at this time. There's a strong possibility your employer will decide to merge the two plans at some later time.

TB: The SEC places selling restrictions on shares of employer stock when a company goes public. The SEC doesn't want the "insiders" who own stock selling their shares immediately after the company goes public. Similar restrictions usually apply to stock held by the 401(k); however, the SEC attorney who is advising your employer will need to tell you whether the same restrictions will apply to both types of stock.

TB: First I'll explain that a "401(a) plan" is a defined contribution plan that is funded solely by the employer. I'm assuming from the information you provided that your employer stopped bringing new employees into the 401(a) plan at the beginning of 1990. Ultimately this plan will die when the last participant has received his/her benefit. An alternative, which the employer apparently is considering, is to transfer all assets of the 401(a) plan into the 401(k) plan. Your employer could do this at any time. By the way, your employer may retain the current investment approach after it transfers the assets from the 401(a) plan to the 401(k) plan. Your employer isn't required to give the participants investment control just because these assets become part of the 401(k) plan.

Your employer could also give participants the option to decide whether to transfer their money to the 401(k) or to leave it in the 401(a) plan. This is less likely because it's more difficult to administer.

The 401(a) plan may contain an annuity payment option. If this is the case, the right to receive an annuity must be preserved when assets are transferred directly from one plan to another. Plans with annuity payment options are cumbersome to administer. This could be the reason why your employer is reluctant to permit direct transfers from the 401(a) plan to the 401(k).

This problem can be avoided by terminating the 401(a) plan; however, doing so would create a new set of issues including giving participants who are still employed a lump sum to use however they wish. This and other issues may be why your employer ultimately decides to retain the 401(a) plan until all benefits are paid or the government changes the law making plan-to-plan transfers easier.

TB: All assets held by a qualified retirement plan are subject to certain fiduciary standards. The primary law that established fiduciary standards is the Employee Retirement Income Security Act passed during 1974. At that time, defined benefit plans that were controlled totally by the employer were the standard. The writers of ERISA didn't foresee the day when the participants would control plans. As a result, there isn't a lot in the law regarding participant-directed investments.

The DOL has issued voluntary regulations under Section 404(c) of ERISA granting some fiduciary relief to employers who choose to follow these regulations, when investments are participant-directed. There is disagreement among legal experts regarding the level of protection these regulations actually provide. Ultimately it is the court that decides on a case-by-case basis.

Uncertainty regarding fiduciary liability also extends to self-directed accounts. For example, one uncertainty of the 404(c) requirements is whether the employer must provide sufficient information to participants about their investment options for the participants to make informed investment decisions. The more options there are, the more difficult it is for the employer to fulfill this requirement. This task is impossible with a wide-open, self-directed account.

Self-directed accounts originated back in the late 60s. Plans were established for professionals that gave each participant the right to invest his/her money in this manner. In several instances, one of the professional participants who had complete control over the investment of his account sued the bank trustee claiming the trustee should have prevented him from making such foolish investments. The bank trustees in these cases had no investment authority. The courts ruled in favor of the bank in all the cases I remember from that era.

My advice to employers who establish self-directed accounts is to limit the investments that are available, preferably to mutual funds. I also advise them to require any participant who decides to use this type of account to sign an agreement accepting full responsibility for the results.

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: Starting to build your retirement nest egg at age 23 is a really big plus. Do everything you can to avoid the temptation to use it for non-retirement purposes. Having this money compound for forty years or more will really pay off. The ideal percentage to put into the 401(k) plan at this stage is the amount that's matched by your employer. For example, if your employer matches the first 6% of your pay that you contribute, put this amount into the plan. If the employer doesn't match any of your contributions, I recommend contributing 6% to the plan. Additionally, you should build some savings outside the plan for emergency purposes and for larger purchases such as a home, car, etc.

TB: Each employer is free to design its 401(k) plan the way it wants, as long as the plan satisfies the legal requirements imposed by the IRS. Regarding loans, employers may not permit participants to borrow more than the maximum amount permitted by the IRS but they are permitted to impose more restrictive limits. In fact, many employers don't permit any loans due to their administrative complexity. The way your employer is administering your plan's loan provision is unusual to me but it's legally permissible.

TB: When one business buys another business, the new owner has complete authority to determine what happens to the retirement plan of the company it purchased unless the purchase agreement limits their authority. The most common practice when one business buys another business is to transfer the assets from one 401(k) plan to the other. However, the purchasing company may also decide to keep the old 401(k) plan going. This is what your new employer has decided at this time. There's a strong possibility your employer will decide to merge the two plans at some later time.

TB: The SEC places selling restrictions on shares of employer stock when a company goes public. The SEC doesn't want the "insiders" who own stock selling their shares immediately after the company goes public. Similar restrictions usually apply to stock held by the 401(k); however, the SEC attorney who is advising your employer will need to tell you whether the same restrictions will apply to both types of stock.

TB: First I'll explain that a "401(a) plan" is a defined contribution plan that is funded solely by the employer. I'm assuming from the information you provided that your employer stopped bringing new employees into the 401(a) plan at the beginning of 1990. Ultimately this plan will die when the last participant has received his/her benefit. An alternative, which the employer apparently is considering, is to transfer all assets of the 401(a) plan into the 401(k) plan. Your employer could do this at any time. By the way, your employer may retain the current investment approach after it transfers the assets from the 401(a) plan to the 401(k) plan. Your employer isn't required to give the participants investment control just because these assets become part of the 401(k) plan.

Your employer could also give participants the option to decide whether to transfer their money to the 401(k) or to leave it in the 401(a) plan. This is less likely because it's more difficult to administer.

The 401(a) plan may contain an annuity payment option. If this is the case, the right to receive an annuity must be preserved when assets are transferred directly from one plan to another. Plans with annuity payment options are cumbersome to administer. This could be the reason why your employer is reluctant to permit direct transfers from the 401(a) plan to the 401(k).

This problem can be avoided by terminating the 401(a) plan; however, doing so would create a new set of issues including giving participants who are still employed a lump sum to use however they wish. This and other issues may be why your employer ultimately decides to retain the 401(a) plan until all benefits are paid or the government changes the law making plan-to-plan transfers easier.

TB: All assets held by a qualified retirement plan are subject to certain fiduciary standards. The primary law that established fiduciary standards is the Employee Retirement Income Security Act passed during 1974. At that time, defined benefit plans that were controlled totally by the employer were the standard. The writers of ERISA didn't foresee the day when the participants would control plans. As a result, there isn't a lot in the law regarding participant-directed investments.

The DOL has issued voluntary regulations under Section 404(c) of ERISA granting some fiduciary relief to employers who choose to follow these regulations, when investments are participant-directed. There is disagreement among legal experts regarding the level of protection these regulations actually provide. Ultimately it is the court that decides on a case-by-case basis.

Uncertainty regarding fiduciary liability also extends to self-directed accounts. For example, one uncertainty of the 404(c) requirements is whether the employer must provide sufficient information to participants about their investment options for the participants to make informed investment decisions. The more options there are, the more difficult it is for the employer to fulfill this requirement. This task is impossible with a wide-open, self-directed account.

Self-directed accounts originated back in the late 60s. Plans were established for professionals that gave each participant the right to invest his/her money in this manner. In several instances, one of the professional participants who had complete control over the investment of his account sued the bank trustee claiming the trustee should have prevented him from making such foolish investments. The bank trustees in these cases had no investment authority. The courts ruled in favor of the bank in all the cases I remember from that era.

My advice to employers who establish self-directed accounts is to limit the investments that are available, preferably to mutual funds. I also advise them to require any participant who decides to use this type of account to sign an agreement accepting full responsibility for the results.

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.