Ted's Table

Technical Terms Annuity Fiduciary Rollover

TB: The biggest difference is the fact that all deposits into an individual deferred annuity are taxed prior to going into the plan. With a 401(k) or traditional IRA, you may generally make contributions before paying tax on the money. (Income limits for deductible contributions to a traditional IRA apply to people who participate in a 401(k) plan.)

For example, let's assume you earn $50,000 a year, are at the 28 percent tax rate and want to contribute 6 percent of pay to your retirement. Your 401(k) contribution will be deducted from your paycheck prior to paying federal income tax — you can contribute $3,000 into the plan without having to pay income tax on it first. With an individual deferred annuity, however, in order to contribute $3,000 you actually have to start with $4,167 of gross pay, which is reduced to $3,000 after paying income taxes.

When you consider the impact of contributing to a 401(k) plan on your take-home pay, you get more mileage out of your money. Again, using a 28 percent tax rate, suppose you contribute $3,000 to a 401(k) plan. The after-tax impact on that contribution is only $2,160, the other $840 is collected by the government in income tax.

Other differences include the following:

1. It is easier to take money out of an individual deferred annuity than a 401(k); and
2. Individual deferred annuities typically have higher expenses than 401(k) investments.

TB: This arrangement is quite unusual and, as you describe it, it is also abusive. There are much better alternatives, and your employer has a fiduciary responsibility to act solely in the best interest of the participants. For example, there are ways of structuring the plan so that 100 percent of your money is invested into the applicable funds and the only fee you would pay is the fund investment management fee.

The Department of Labor (DOL) is responsible for administering this area of the law. It is permissible to pass all administrative fees to the plan but the fees must be reasonable. The DOL has been auditing employers to determine whether expenses paid by participants meet this standard. I don't think your employer would make out very well if the plan was audited by the DOL.

As a way to convince your boss of the potential gravity of this situation, you may feel free to give my comments to him — and I hope they might be as compelling as anything you can say.

By the way, holding the money in a local bank account for six months may also be a problem, unless the account in which it is held is a plan account with a trustee rather than a company or personal account.

Related Reading Avoid Penalties with a 401(k) Rollover Your Guide to Understanding 401(k) Plan Fees The ABCs of Annuities

TB: I agree with your recommendation. It does not make sense to leave money in a former employer's plan if you are not satisfied with the investments and/or you do not trust those who run the plan. Your wife should have the money transferred directly into an IRA. I also recommend contacting the Department of Labor's Pension and Welfare Benefits Administration office closest to you if she has any difficulty getting the money transferred to her IRA.

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 Annuity Fiduciary Rollover

TB: The biggest difference is the fact that all deposits into an individual deferred annuity are taxed prior to going into the plan. With a 401(k) or traditional IRA, you may generally make contributions before paying tax on the money. (Income limits for deductible contributions to a traditional IRA apply to people who participate in a 401(k) plan.)

For example, let's assume you earn $50,000 a year, are at the 28 percent tax rate and want to contribute 6 percent of pay to your retirement. Your 401(k) contribution will be deducted from your paycheck prior to paying federal income tax — you can contribute $3,000 into the plan without having to pay income tax on it first. With an individual deferred annuity, however, in order to contribute $3,000 you actually have to start with $4,167 of gross pay, which is reduced to $3,000 after paying income taxes.

When you consider the impact of contributing to a 401(k) plan on your take-home pay, you get more mileage out of your money. Again, using a 28 percent tax rate, suppose you contribute $3,000 to a 401(k) plan. The after-tax impact on that contribution is only $2,160, the other $840 is collected by the government in income tax.

Other differences include the following:

1. It is easier to take money out of an individual deferred annuity than a 401(k); and
2. Individual deferred annuities typically have higher expenses than 401(k) investments.

TB: This arrangement is quite unusual and, as you describe it, it is also abusive. There are much better alternatives, and your employer has a fiduciary responsibility to act solely in the best interest of the participants. For example, there are ways of structuring the plan so that 100 percent of your money is invested into the applicable funds and the only fee you would pay is the fund investment management fee.

The Department of Labor (DOL) is responsible for administering this area of the law. It is permissible to pass all administrative fees to the plan but the fees must be reasonable. The DOL has been auditing employers to determine whether expenses paid by participants meet this standard. I don't think your employer would make out very well if the plan was audited by the DOL.

As a way to convince your boss of the potential gravity of this situation, you may feel free to give my comments to him — and I hope they might be as compelling as anything you can say.

By the way, holding the money in a local bank account for six months may also be a problem, unless the account in which it is held is a plan account with a trustee rather than a company or personal account.

Related Reading Avoid Penalties with a 401(k) Rollover Your Guide to Understanding 401(k) Plan Fees The ABCs of Annuities

TB: I agree with your recommendation. It does not make sense to leave money in a former employer's plan if you are not satisfied with the investments and/or you do not trust those who run the plan. Your wife should have the money transferred directly into an IRA. I also recommend contacting the Department of Labor's Pension and Welfare Benefits Administration office closest to you if she has any difficulty getting the money transferred to her IRA.

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.