Ted's Table

Technical Terms Matching contribution Profit-sharing plan Safe harbor plan Vesting schedule

TB: Only highly profitable companies can afford to contribute 15 percent of pay to a profit-sharing plan for their employees, and they usually can afford to do so for a limited number of years. Successful companies must also grow because standing still is not an option for a business. Businesses that attempt to stand still usually decline. Growth strains working capital and profit because new business opportunities are not immediately profitable. Profit margins can also decline for a variety of reasons, such as increased competition. Based upon my experience, growing companies ultimately reach a point at which they can no longer afford to contribute 15 percent of each employee's pay to a retirement plan.

Not having a 401(k) may also be a competitive disadvantage, making it more difficult for your employer to recruit new employees because these plans are so popular. A profit-sharing plan with a 15 percent employer contribution is a much better plan than a 401(k) for long-term employees, but potential new hires may not be thrilled with this plan if they have to stay with the employer for five years before any vested benefits are earned. (You did not mention the vesting schedule for your plan, but employers are allowed to require five years before any vesting occurs.) Five years is a very long period for most new employees because few new hires today expect to stay with a company that long. Employees who join your company and leave before the employer contributions to the profit-sharing plan vest do not gain any retirement benefits during the time they are with your company. This would be a big negative for employees who are used to contributing to a 401(k) and who don't want to miss those years of contributions.

Companies such as yours usually add a 401(k) with an employer-matching contribution and continue the profit-sharing plan with a reduced contribution. This change will not generally be beneficial for those of you have been receiving a 15 percent employer contribution. But, you can be thankful for the 10 years when you did receive such a contribution because you have done better than most employees. An employer-matching contribution plus a profit-sharing contribution of 5 percent or more is still better than you will do at most companies. I have always told my corporate clients to tell employees why they are making benefit changes, even when the changes are negative. Hopefully your employer will explain why it is making this change rather than simply trying to convince you that the changes are for your benefit.

TB: The 3 percent nonelective (or matching) contribution in a safe harbor 401(k) plan can go to all eligible employees, including those that are highly compensated. However, there are a number of rules you must follow to satisfy the safe harbor requirements. For example, eligible employees who leave during the year must receive the contribution that is used to satisfy the safe harbor design.

TB: The delay was probably due to the fact that the previous provider did not deliver the participant data at the time the money was forwarded to the new provider or the amount of money forwarded did not agree with the participant records. Changing providers is a rather complex process that is difficult to accomplish without hitting some snags, despite the best of planning. The new provider is always dependent upon cooperation from the old provider, and the old provider usually has other priorities than attending to the needs of a departing customer.

There really isn't anything you can do other than borrowing or withdrawing your money prior to the transfer if you are eligible to do so. For example, if you are over age 59½ and your plan permits in-service withdrawals after this age, you can transfer you money to an IRA. You can borrow up to 50 percent of your vested account value if your plan permits, invest the money outside the plan during the transfer period, and repay it after the transfer has been completed.

Related Reading Follow the 401(k) Money Trail: Where It Begins, Where It Ends Investing Time in Your 401(k) Statement Helps You Invest in Your Retirement

Being forced to transfer money from one set of funds to another continues to be a source of frustration for participants. This is one of the reasons why I am working on changing 401(k) plans so that investment control is given to employees. Employees have been told it is their responsibility to determine how their money is to be invested but then they are forced to change funds without their approval. This is an obvious contradiction that will become increasingly troublesome for both employers and employees.

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

Technical Terms Matching contribution Profit-sharing plan Safe harbor plan Vesting schedule

TB: Only highly profitable companies can afford to contribute 15 percent of pay to a profit-sharing plan for their employees, and they usually can afford to do so for a limited number of years. Successful companies must also grow because standing still is not an option for a business. Businesses that attempt to stand still usually decline. Growth strains working capital and profit because new business opportunities are not immediately profitable. Profit margins can also decline for a variety of reasons, such as increased competition. Based upon my experience, growing companies ultimately reach a point at which they can no longer afford to contribute 15 percent of each employee's pay to a retirement plan.

Not having a 401(k) may also be a competitive disadvantage, making it more difficult for your employer to recruit new employees because these plans are so popular. A profit-sharing plan with a 15 percent employer contribution is a much better plan than a 401(k) for long-term employees, but potential new hires may not be thrilled with this plan if they have to stay with the employer for five years before any vested benefits are earned. (You did not mention the vesting schedule for your plan, but employers are allowed to require five years before any vesting occurs.) Five years is a very long period for most new employees because few new hires today expect to stay with a company that long. Employees who join your company and leave before the employer contributions to the profit-sharing plan vest do not gain any retirement benefits during the time they are with your company. This would be a big negative for employees who are used to contributing to a 401(k) and who don't want to miss those years of contributions.

Companies such as yours usually add a 401(k) with an employer-matching contribution and continue the profit-sharing plan with a reduced contribution. This change will not generally be beneficial for those of you have been receiving a 15 percent employer contribution. But, you can be thankful for the 10 years when you did receive such a contribution because you have done better than most employees. An employer-matching contribution plus a profit-sharing contribution of 5 percent or more is still better than you will do at most companies. I have always told my corporate clients to tell employees why they are making benefit changes, even when the changes are negative. Hopefully your employer will explain why it is making this change rather than simply trying to convince you that the changes are for your benefit.

TB: The 3 percent nonelective (or matching) contribution in a safe harbor 401(k) plan can go to all eligible employees, including those that are highly compensated. However, there are a number of rules you must follow to satisfy the safe harbor requirements. For example, eligible employees who leave during the year must receive the contribution that is used to satisfy the safe harbor design.

TB: The delay was probably due to the fact that the previous provider did not deliver the participant data at the time the money was forwarded to the new provider or the amount of money forwarded did not agree with the participant records. Changing providers is a rather complex process that is difficult to accomplish without hitting some snags, despite the best of planning. The new provider is always dependent upon cooperation from the old provider, and the old provider usually has other priorities than attending to the needs of a departing customer.

There really isn't anything you can do other than borrowing or withdrawing your money prior to the transfer if you are eligible to do so. For example, if you are over age 59½ and your plan permits in-service withdrawals after this age, you can transfer you money to an IRA. You can borrow up to 50 percent of your vested account value if your plan permits, invest the money outside the plan during the transfer period, and repay it after the transfer has been completed.

Related Reading Follow the 401(k) Money Trail: Where It Begins, Where It Ends Investing Time in Your 401(k) Statement Helps You Invest in Your Retirement

Being forced to transfer money from one set of funds to another continues to be a source of frustration for participants. This is one of the reasons why I am working on changing 401(k) plans so that investment control is given to employees. Employees have been told it is their responsibility to determine how their money is to be invested but then they are forced to change funds without their approval. This is an obvious contradiction that will become increasingly troublesome for both employers and employees.

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.