VARIOUS DEFINED CONTRIBUTION PENSION PLANS AND ADVANTAGES OF THE 401(k)

VARIOUS DEFINED CONTRIBUTION PENSION PLANS AND ADVANTAGES OF THE 401(k)

401k plans are the most popular DC plan today with employers and employees alike. 401(k) plans are arguably the best government-sanctioned, tax-deferred retirement savings opportunities in the United States; their numbers have grown commensurably since their institution by Congress in 1978. One estimate, by CHALK 401(k) Advisory Board, Inc., places the number of qualified 401(k) plans in 1997 (the last year surveyed) at 225,000, and the number of participants in those plans at approximately 28 million; the Investment Company Institute (ICI) estimates 45 million participants in 2004. New plans continue to grow in number at an annual rate of more than 14% (U.S. Department of Labor).

401(k) plans must be sponsored by an employer. Millions of American workers can’t take advantage of the 401(k)’s many attractive attributes because, for one reason or another — typically high plan costs, plan inflexibility, and/or prohibitive minimum participation standards — their employers do not sponsor a plan. In particular, very small, small, and medium-sized companies have found sponsorship difficult if not impossible. Some 89% of very small companies (10-50 employees), 72% of small companies (50 - 100 employees), and 66% of medium-sized companies (100 - 250 employees) do not have 401(k) plans (Census Bureau figures). These figures do not include the companies that have fewer than 10 employees, what might be called "micro" companies.

The Labor Department is currently auditing 401(k) plans of all sizes because of a trend they think may violate current pension laws. Many companies, especially smaller businesses, are knowingly or unknowingly shifting plan administrative expenses to plan participants. This shift of plan expenses come in the form of excessive "hidden fees" that are deducted directly from participants’ savings by certain plan providers and investment providers. Because of lax reporting requirements, no one really knows how much money changes hands behind the scenes, but it is estimated that excessive fees may be as much as $1.5 billion per year, and growing.

The three primary reasons why 80% of America’s small businesses do not offer 401(k) plans to their employees are: (a) perceived cost of employer-sponsored retirement plans, (b) perceived complexity of company-sponsored retirement plans, and (c) limited investment options. Mutual fund companies offering 401(k) plans to small businesses do so by pre-packaging administration with their proprietary fund investments; this pre-packaged approach, called "bundled 401(k)" tends to be pricey for small companies, limited features and limited investment options. Employees who participate in bundled 401(k) plans typically do not have access to investments not offered by the mutual fund company, and do not have access to the most popular investment option today—the individual self-directed discount brokerage account.

401(k) plans have grown dramatically since their institution by Congress in 1978. One estimate, by CHALK 401(k) Advisory Board, Inc., places the number of qualified 401(k) plans in 1997 (the last year surveyed) at 225,000, and the number of participants in those plans at approximately 28 million; the Investment Company Institute (ICI) estimates 36.7 million participants in 1998. New plans continue to grow in number at an annual rate of more than 14% (U.S. Department of Labor).

Millions of American workers can’t take advantage of the 401(k)’s many attractive attributes because, for one reason or another — typically high plan costs, plan inflexibility, and/or prohibitive minimum participation standards — their employers do not sponsor a plan. In particular, very small, small, and medium-sized companies have found sponsorship difficult if not impossible. Some 89% of very small companies (10-50 employees), 72% of small companies (50 - 100 employees), and 66% of medium-sized companies (100 - 250 employees) do not have 401(k) plans (Census Bureau figures).

The Department of Labor (DOL) is auditing 401(k) plans of all sizes because of a trend they think may violate current pension laws. Many companies, especially smaller businesses, are knowingly or unknowingly shifting plan administrative expenses to plan participants. This shift of plan expenses come in the form of excessive "hidden fees" that are deducted directly from participants’ savings by certain plan providers and investment providers. Because of lax reporting requirements, no one really knows how much money changes hands behind the scenes, but it is estimated that excessive fees may be as much as $1.5 billion per year, and growing.

80% of America’s small businesses do not offer 401(k) plans to their employees for three reasons. The reasons are: (a) perceived cost of employer-sponsored retirement plans, (b) perceived complexity of company-sponsored retirement plans, and (c) limited investment options. Mutual fund companies offering 401(k) plans to small businesses do so by pre-packaging administration with their proprietary fund investments; this pre-packaged approach, called "bundled 401(k)" tends to be pricey for small companies, limited features and limited investment options. Employees who participate in bundled 401(k) plans typically do not have access to investments not offered by the mutual fund company, and do not have access to the most popular investment option today—the individual self-directed discount brokerage account.

401k Fact:

Distributions from a 401(k) plan may qualify for optional lump-sum > distribution treatment or rollover treatment as long as they meet the > respective requirements. Many 401(k) plans allow employees to make a > hardship withdrawal because of immediate and heavy financial needs. > Generally, hardship distributions from a 401(k) plan are limited to the > amount of the employee's elective deferrals only, and do not include any > income earned on the deferred amounts. Hardship distributions are not > treated as eligible rollover distributions. Target Labs, a small > California-based employer (www.targetlab.com) , has a very successful > 401(k) loan program for its employees.

Various Retirement Plans for Small Businesses

The advantages of a retirement plan are numerous. There are economic, business and tax advantages for your business, for your employees and for you.

This extract from the 2004 Small Business Resource Guide CD provides retirement plan information for you, the business owner, including why a retirement plan makes good sense for you, selecting the right plan for your business, operating your retirement plan, filing information returns, and more

A retirement plan may give you an important competitive edge in attracting and keeping the best employees - and help you plan for your own retirement years. Information to help you choose the type of plan that is right for your business and get that plan into operation

Retirement plans are savings plans that offer you tax advantages to set aside money for your and your employees' retirement.

Whether you choose to have a SEP, SIMPLE or other IRA-based plan or you choose to have a qualified plan, retirement plans are a great way for you and your employees to save for retirement. You can deduct contributions you make to the plan for you and your employees. The contributions and earnings are generally tax-free until you or your employees receive distributions from the plan in later years.

All retirement plans have important tax, business and other implications for employers and employees. Therefore, you may want to discuss any retirement savings plan with a tax or financial advisor.

Retirement plans are savings plans that offer you tax advantages to set aside money for your and your employees' retirement.

All retirement plans have important tax, business and other implications for employers and employees. Therefore, you may want to discuss any retirement savings plan with a tax or financial advisor.

Visit the IRS website for more information on retirement plans.

Simplified Employee Pension (SEP)
SIMPLE Retirement Plan
Qualified Plans
Individual Retirement Arrangement (IRA)
Which Plan is Right for Your Business?
Retirement Plans for Small Businesses

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Eligibility Requirements for Participating in a Retirement Plan

Regardless of the retirement plan you choose, certain "eligibility" requirements apply. "Eligibility" means when your employees must be included in the plan – when they must start to have contributions made on their behalf.

For example, if you establish a SIMPLE-IRA plan, all your employees become eligible to participate in the plan if they:

Earned income of at least $5,000 in either of the prior two years.
Are reasonably expected to earn at least $5,000 in the current year.
Are not covered by a collective bargaining agreement (if retirement benefits were the subject of good-faith bargaining).
These are the minimum standards. The requirements can always be more liberal. For instance, your SIMPLE-IRA plan could provide for participation as long as the employee earns any compensation. However, the plan could not require the employees be age 25 or that they must have worked for you for at least five years in order to participate in the SIMPLE-IRA.

Check with your financial advisor to see what plan and what eligibility standards – tighter or looser – are right for you and your business.

Which Plan is Right for Your Business?

There are many factors to consider when deciding which plan best fits your business. When determining which plan is right for you, consult a financial advisor.

Payroll Deduction IRA
Even if an employer does not want to adopt a retirement plan, it can allow its employees to contribute to an IRA through payroll deductions, providing a simple and direct way for eligible employees to save.

Simplified Employee Pension (SEP)
Simplified Employee Pensions (SEPs) provide a simplified method for employers to make contributions to a retirement plan for their employees. Instead of establishing a profit-sharing or money purchase plan with a trust, employers can adopt a SEP agreement and make contributions directly to an individual retirement account or an individual retirement annuity established for each eligible employee.

SIMPLE-IRA Plan
A Savings Incentive Match Plan for Employees, or SIMPLE gives small employers a simplified method to make contributions toward their employees’ retirement and their own retirement. A SIMPLE-IRA plan includes a written salary reduction agreement between employee and employer that allows the employee, if eligible, to choose to have the employer contribute the salary reductions to a SIMPLE-IRA on the employee’s behalf.

401(k) Plan
A type of defined contribution plan that allows employee salary deferrals and/or employer contributions.

SIMPLE 401(k) Plan
A type of defined contribution plan available to the small business owner with 100 or fewer employees. Under a SIMPLE 401(k) Plan, an employee can elect to defer some compensation. Unlike a standard 401(k) plan, the employer must make either: (1) a matching contribution up to 3% of each employee's pay, or (2) a non-elective contribution of 2% of each eligible employee's pay.

403(b) Tax-Sheltered Annuity Plan
Annuity plans for certain public schools, colleges, universities, churches, public hospitals, and charitable entities deemed tax-exempt under Internal Revenue Code section 501(c)(3).

Profit-Sharing Plan
A type of defined contribution plan that allows discretionary annual employer contributions.

Additional non-profit websites that include relevant unbiased information about 401k plans include: www.ezfedforms.com.

Money Purchase Plan
A type of defined contribution plan in which employer contributions are fixed.

Defined Benefit Plan
A type of plan that is funded primarily by the employer and whose contribution is actuarially determined.

Important References:

Form 5300 & Instructions, Application for Determination for Employee Benefit Plan

Form 5304-SIMPLE, Simple Incentive Match Plan for Employees of Small Employers (SIMPLE)

Form 5305-SIMPLE, Simple Incentive Match Plan for Employees of Small Employers (SIMPLE)

Form 5305-S, SIMPLE Individual Retirement Trust Account

Form 5305-SA, SIMPLE Individual Retirement Custodial Account

Form 5305-SEP, Simplified Employee Pension-Individual Retirement Accounts Contribution Agreement

Form 5307 & Instructions, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans

Form 5500 & Instructions, Annual Return/Report of Employee Benefit Plan. RRP

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