Ted's Table

TB: Congress is in the final stage of wrapping up its legislative work for this year. Many retirement-related changes were included in the tax reduction bill, which President Clinton vetoed. Some of these changes have also been included in the minimum-wage bill, which the President has also indicated he will veto. If this happens, no retirement changes are likely to occur this year including the Roth 401(k). We'll have to see what happens in the future.

TB: There are special 10-year income averaging rules, which are available to certain individuals. These rules will enable these individuals to reduce the tax bite if they take a lump-sum distribution and don't roll it over into an IRA or another plan. If you're in this category, you should seek help from a qualified professional.

TB: You're correct that 401(k)s don't currently permit "catch-up" contributions. However, 403(b) plans do. Efforts are being made to permit such contributions to 401(k) but it hasn't been possible to date. These efforts are likely to continue next year. The potential for passage may improve as we move toward the next round of national elections.

TB: Employers aren't required to make newly hired employees wait for a year before they join the 401(k). Many employers have either reduced or eliminated the waiting period to help them attract good employees. When you interview, ask your prospective employer how long you have to wait to get into the 401(k). If it's a year, tell them they should consider reducing this period. If your new employer doesn't permit you to participate for the first year, I recommend putting the amount you would invest through your 401(k) into an IRA or into mutual funds that aren't tax-sheltered. The easiest way to do this is by having the mutual fund company deduct this amount from your bank account each month. This will enable you to match the semi-forced savings that occurs with a 401(k).

TB: Your question is a great one, and one that I'm frequently asked. It's difficult to understand why you can select from thousands of funds when you're investing a small amount outside the 401(k) but you're limited to the funds selected by your employer when you're investing a lot of money inside the 401(k). There are a number of reasons why you're limited within the 401(k).

One is that the financial organization that handles your company's plan prefers to have only its funds offered to the employees of your company. This is the case with many other fund families as well. The Form 5500, which must be filed annually with the government, is another barrier to a totally open environment where employees can pick the financial organization where they invest their money. The plan sponsor is required to compile comprehensive financial information for all assets held by the plan. It would be very difficult and expensive to gather this information if each employee selected his/her own investment organization. The answer to this problem would be to eliminate the financial reporting from the Form 5500.

The remaining major issue involves the fiduciary liability plan sponsors face when they offer a 401(k) plan. The law currently requires the employer to select the applicable funds considering what is solely in the best interest of participants. As a rather sophisticated investor, your best interest is for the employer to provide you with the same opportunity you have as an individual investor to pick from thousands of funds. However, most employees have difficulty deciding from among a dozen or so funds. Your employer must consider how these employees will cope if an unlimited number of funds are available.

Plan sponsors can attempt to reduce their fiduciary liability by following regulations issued under Section 404(c) of the Employee Retirement Income Security Act. Employers that follow the regulations issued by the Department of Labor may gain some legal protection; however, these regulations require the employer to provide sufficient information to participants to make informed investment decisions. The more funds that are offered, the more difficult it is for the employer to satisfy this requirement. I advise employers to limit the number of funds they offer unless they're willing to provide an independent investment advisor to help participants who aren't as sophisticated as you, to select their funds. Here again, it will help if employers are relieved from this fiduciary responsibility if they permit employees to pick any financial organization they wish.

It's my opinion that employers will cease to be the investment gatekeepers during the next ten years. Ultimately, participants will be able to select the financial organization where they want their 401(k) money invested. The employer will send the money to this organization just like it sends your paycheck to the financial organization you select.

In the meantime, your employer can do what many others are doing - add a self-directed brokerage account to your plan. Those who utilize this feature pay a special fee to gain access to a large network of funds and other investments. You should ask your employer to add this feature.

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: Congress is in the final stage of wrapping up its legislative work for this year. Many retirement-related changes were included in the tax reduction bill, which President Clinton vetoed. Some of these changes have also been included in the minimum-wage bill, which the President has also indicated he will veto. If this happens, no retirement changes are likely to occur this year including the Roth 401(k). We'll have to see what happens in the future.

TB: There are special 10-year income averaging rules, which are available to certain individuals. These rules will enable these individuals to reduce the tax bite if they take a lump-sum distribution and don't roll it over into an IRA or another plan. If you're in this category, you should seek help from a qualified professional.

TB: You're correct that 401(k)s don't currently permit "catch-up" contributions. However, 403(b) plans do. Efforts are being made to permit such contributions to 401(k) but it hasn't been possible to date. These efforts are likely to continue next year. The potential for passage may improve as we move toward the next round of national elections.

TB: Employers aren't required to make newly hired employees wait for a year before they join the 401(k). Many employers have either reduced or eliminated the waiting period to help them attract good employees. When you interview, ask your prospective employer how long you have to wait to get into the 401(k). If it's a year, tell them they should consider reducing this period. If your new employer doesn't permit you to participate for the first year, I recommend putting the amount you would invest through your 401(k) into an IRA or into mutual funds that aren't tax-sheltered. The easiest way to do this is by having the mutual fund company deduct this amount from your bank account each month. This will enable you to match the semi-forced savings that occurs with a 401(k).

TB: Your question is a great one, and one that I'm frequently asked. It's difficult to understand why you can select from thousands of funds when you're investing a small amount outside the 401(k) but you're limited to the funds selected by your employer when you're investing a lot of money inside the 401(k). There are a number of reasons why you're limited within the 401(k).

One is that the financial organization that handles your company's plan prefers to have only its funds offered to the employees of your company. This is the case with many other fund families as well. The Form 5500, which must be filed annually with the government, is another barrier to a totally open environment where employees can pick the financial organization where they invest their money. The plan sponsor is required to compile comprehensive financial information for all assets held by the plan. It would be very difficult and expensive to gather this information if each employee selected his/her own investment organization. The answer to this problem would be to eliminate the financial reporting from the Form 5500.

The remaining major issue involves the fiduciary liability plan sponsors face when they offer a 401(k) plan. The law currently requires the employer to select the applicable funds considering what is solely in the best interest of participants. As a rather sophisticated investor, your best interest is for the employer to provide you with the same opportunity you have as an individual investor to pick from thousands of funds. However, most employees have difficulty deciding from among a dozen or so funds. Your employer must consider how these employees will cope if an unlimited number of funds are available.

Plan sponsors can attempt to reduce their fiduciary liability by following regulations issued under Section 404(c) of the Employee Retirement Income Security Act. Employers that follow the regulations issued by the Department of Labor may gain some legal protection; however, these regulations require the employer to provide sufficient information to participants to make informed investment decisions. The more funds that are offered, the more difficult it is for the employer to satisfy this requirement. I advise employers to limit the number of funds they offer unless they're willing to provide an independent investment advisor to help participants who aren't as sophisticated as you, to select their funds. Here again, it will help if employers are relieved from this fiduciary responsibility if they permit employees to pick any financial organization they wish.

It's my opinion that employers will cease to be the investment gatekeepers during the next ten years. Ultimately, participants will be able to select the financial organization where they want their 401(k) money invested. The employer will send the money to this organization just like it sends your paycheck to the financial organization you select.

In the meantime, your employer can do what many others are doing - add a self-directed brokerage account to your plan. Those who utilize this feature pay a special fee to gain access to a large network of funds and other investments. You should ask your employer to add this feature.

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.