401K

[MXR Dad]

I have researched but cant seem to find the answer(s) to something I'm wondering about. My curiosity started when the owner of the company I work for asked me if I have been employed long enough to participate in the 401. I informed him yes I have been here long enough and yes I am participating. He seems eager to have all employees participating.Over the course of the year, I bet he has asked me if I particpate in the 401 at least 3-4 times. (Seems he forgets who he asked, they probably have approx 200 employees).

I cant help but belive theres an ulterior motive for wanting every employeed to participate since the company matches .50 up to 6%. And he is the owner of the company. I aint getting that warm fuzzy feeling here. Can someone shed some light here? Is it because the money gets invested in his company? I just have a hard time believing he is truly worried about every employees walfare when we retire and leave the company. hhhmmm.

The company is big now and getting bigger every year. I dont see the company going under any time soon.

[PBAT]

I don't know the exact rules, but the amount that the top earners at a company can invest in their 401k is limited by the amount that the lower earners invest. So he wants as many employees as possible to participate so he can put more of his own income into his 401k.

I had the same situation with the former owner of our company. A couple years ago they switched to an automatic enrollment (everyone not already enrolled was automatically enrolled at a 3% contribution into a target-date fund based on their age, unless they opted out). Now new employees that don't bother to sign up or opt out are automatically enrolled after 90 days.

[MXR Dad]

If this is the case, I am feeling better now. Maybe enough to get those warm fuzzies again!!!

[Alan]

Originally Posted by PBAT

I don't know the exact rules, but the amount that the top earners at a company can invest in their 401k is limited by the amount that the lower earners invest. So he wants as many employees as possible to participate so he can put more of his own income into his 401k.

I had the same situation with the former owner of our company. A couple years ago they switched to an automatic enrollment (everyone not already enrolled was automatically enrolled at a 3% contribution into a target-date fund based on their age, unless they opted out). Now new employees that don't bother to sign up or opt out are automatically enrolled after 90 days.

Correct, I'm sure this is why the owner is asking.

From Wikipedia

Highly Compensated Employees (HCE)
To help ensure that companies extend their 401(k) plans to low-paid employees, an IRS rule limits the maximum deferral by the company's "highly compensated" employees, based on the average deferral by the company's non-highly compensated employees. If the rank and file saves more for retirement, then the executives are allowed to save more for retirement. This provision is enforced via "non-discrimination testing". Non-discrimination testing takes the deferral rates of "highly compensated employees" (HCEs) and compares them to non-highly compensated employees (NHCEs). An HCE in 2008 is defined as an employee with compensation of greater than $100,000 in 2007 or an employee that owned more than 5% of the business at any time during the year or the preceding year. That is for plans whose first day of the plan year is in calendar year 2007, we look to each employee's prior year gross compensation (also known as 'Medicare wages') and those who earned more than $100,000 are HCEs. Most testing done now in 2008 will be for the 2007 plan year when we compare employees' 2006 plan year gross compensation to the $95,000 threshold for 2006 to determine who is HCE and who is a NHCE.
The average deferral percentage (ADP) of all HCEs, as a group, can be no more than 2% greater (or 150% of, whichever is less) than the NHCEs, as a group. This is known as the ADP test. When a plan fails the ADP test, it essentially has two options to come into compliance. It can have a return of excess done to the HCEs to bring their ADP to a lower, passing, level. Or it can process a "qualified non-elective contribution" (QNEC) to some or all of the NHCEs to raise their ADP to a passing level. The return of excess requires the plan to send a taxable distribution to the HCEs (or reclassify regular contributions as catch-up contributions subject to the annual catch-up limit for those HCEs over 50) by March 15th of the year following the failed test. A QNEC must be an immediately vested contribution.

[MXR Dad]

Alright, I feel better now. Thanks for that post Alan. I knew there was somthing there, I just didnt know what.

I'm sure he was concerned about my retirement; not just getting his account richer !!!!! HAHAHA

[Alan]

Originally Posted by MXR Dad

Alright, I feel better now. Thanks for that post Alan. I knew there was somthing there, I just didnt know what.

I'm sure he was concerned about my retirement; not just getting his account richer !!!!! HAHAHA

I'm sure he WAS concerned about getting his account richer, but fortunately for you, it is not at your disadvantage.

[Marquette]

Tell him to switch the 401(k) to a safe harbor 401(k).

I used to be at a company where we were limited to 4% of compensation (and the limit when I was there looks to be much lower than it is now). I'm now at a company that has a safe harbor 401(k), and so I'm only limited by IRS regs.

401(k) Resource Guide - Plan Participants - 401(k) Plan Overview

Safe harbor 401(k) plans. A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals. The safe harbor 401(k) plan is not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans.
Employers sponsoring safe harbor 401(k) plans must satisfy certain employee notice requirements. The notice requirements are satisfied if the employer provides each eligible employee with written notice of the employee's rights and obligations under the plan and the notice satisfies content and timing requirements.
In order to satisfy the content requirement, the notice must describe the safe harbor method used, how eligible employees make elections, any other plans involved, etc.
The timing requirement requires that the employer must provide notice within a reasonable period before each plan year. This requirement is deemed to be satisfied if the notice is provided to each eligible employee at least 30 days and not more than 90 days before the beginning of each plan year. There are special rules for employees who become eligible after the 90th day.
Both the traditional and safe harbor plans are for employers of any size and can be combined with other retirement plans.

[MXR Dad]

I am curious what the opinions are with my allocations. My 401 K is with John Hancock. I have 1 fund where empolyee and employer matched monies go to the John H Lifestyle Aggressive. Good idea? Maybe I need to change it? When I started the 401 K I had no idea what to do, so thats why its there. I'm starting to get educated on this whole thing but still have a way to go yet. Until I learn more, I am comfortable with the pros recommendations.

[Lusitan]

What fund options do you have in your 401(k) plan at work, MXR Dad?

[MXR Dad]

I really dont know to be honest with you. I know there are target dates like 2030 etc. And the 500 fund. I know thats probably not much info right now; I will check to see what the options are.

[samclem]

Originally Posted by MXR Dad

I am curious what the opinions are with my allocations. My 401 K is with John Hancock. I have 1 fund where empolyee and employer matched monies go to the John H Lifestyle Aggressive. Good idea?

The expense ratio on the "A shares is 1.52% per year on this John Hancock Lifestyle Aggressive fund (at least the version available to the public). Hopefully you've got cheaper options available to you.

[Marquette]

If you can also invest in an IRA or Roth IRA or depending on your goals, you may want to look at investing only to the company match and then invest the rest outside of your employer.... first, get a list of your fund options and prospectuses and figure out choices and expense ratios.

[Alan]

Originally Posted by Marquette

If you can also invest in an IRA or Roth IRA or depending on your goals, you may want to look at investing only to the company match and then invest the rest outside of your employer.... first, get a list of your fund options and prospectuses and figure out choices and expense ratios.

This was the advice I gave to my 26 yr old son when he started work last year. The fund options in his plan's 401(k) all look expensive.

[MXR Dad]

Lets see if I am even close with my figures. Lets use easy numbers:

If anual salary is 100,000 and the company matches .50 up to 6% then the most they will put in is $6,ooo. Therefore, I would need to put in $12,000 per year. Is this correct or am I way off with my numbers?

[Marquette]

No, basically, they'll match 50 cents on the dollar for every dollar you put in up to 6% of your salary. So, if you make 100k and put in 6k, they put in 3k. If you put in 7k, they put in 3k. If you put in 5k, they put in 2,500.

[Lusitan]

I read that as saying that the company will match 50% of your contributions, up to the first 6% that you put in (i.e., you put in 6%, your company will kick in another 3% on top of that -- half of what you're putting in at 6% -- but that's the max they will match). So in your case, you'd be putting in 6,000, your company would kick in an extra 3,000. [My employer does not match at all, so take my interpretation with a grain of salt, I'm sure some others will comment.]

After that, as has been suggested you should consider investing additional retirement funds into a Roth IRA (max for 2008 is 5,000 I believe). If you still have funds left over for retirement investing after that, then considering increasing your 401(k) contribution beyond 6%. You're allowed to contribute up to $15,500 each year.

If you get some plan information about your 401(k) and post what funds you have available to you, people here can give you good advice about what funds to consider. The important thing is that you (1) create an asset allocation between stocks/bonds that's appropriate for your age and (2) keep your investment expenses low.

It can be as easy as going with a single fund (e.g., I use a Target Retirement fund in my portfolio) or two or three funds, depending on what your plan offers.

[MXR Dad]

Man, what Marquette is saying is what I was trying to say, but my fingers got a little quick on me. Lusitan is saying the same thing I beleive. OK. I will check the plans and get back.

[MXR Dad]

OK. I checked the avaialbilty of funds and they are too numerous to list. I printed a 9 page list of options from S&P 500, Life Cycle 2010, 2020,2025 etc. Then theres JH Lifestyle Aggressive, or growth, or balanced, or Conservative. Theres JH T Rowe Price Health Sci. Small caps, large caps, JH American, Total Stock,JH Pimco Blobal Bond and many many more. I wish I could paste the options to the board. I dont know if thats OK or not.

The ER is from 1.0 to as high as 1.7. The only 0 I see is the John Hancock Stable, S&P 500, Lehman Bros Govnt Corp Bond, Lipper International Index, Russell 2000 index.

Hhhmmm. I dunno. I just dunno yet.

[mb]

Originally Posted by MXR Dad

OK. I checked the avaialbilty of funds and they are too numerous to list. I printed a 9 page list of options from S&P 500, Life Cycle 2010, 2020,2025 etc. Then theres JH Lifestyle Aggressive, or growth, or balanced, or Conservative. Theres JH T Rowe Price Health Sci. Small caps, large caps, JH American, Total Stock,JH Pimco Blobal Bond and many many more. I wish I could paste the options to the board. I dont know if thats OK or not.

The ER is from 1.0 to as high as 1.7. The only 0 I see is the John Hancock Stable, S&P 500, Lehman Bros Govnt Corp Bond, Lipper International Index, Russell 2000 index.

Hhhmmm. I dunno. I just dunno yet.

Do you mean 0 point somthing for the expense ratio? I doubt that anything is 0!

For now one of the Life Cycle Funds is probably a good choice. Hopefully the expense ratio is <1.0%. If the ER is higher than that you might want to look at dividing it up between the S&P500 Index, International Index, Russell 2000 Index and a bond fund.

William Bernstein's book "The Four Pillars of Investing" is a good place to start if you want to learn more about building a fund portfolio that fits your needs.

MB

[CitricAcid]

Originally Posted by mb

Do you mean 0 point somthing for the expense ratio? I doubt that anything is 0!

For now one of the Life Cycle Funds is probably a good choice. Hopefully the expense ratio is <1.0%. If the ER is higher than that you might want to look at dividing it up between the S&P500 Index, International Index, Russell 2000 Index and a bond fund.

William Bernstein's book "The Four Pillars of Investing" is a good place to start if you want to learn more about building a fund portfolio that fits your needs.

MB

I would second the need to read Bernstein's book, establish an asset allocation and then be able to pick and choose which low-cost funds best fit your needs and risk profile.