Understanding and Choosing 401(k) Plans

Salary and vacation pay may no longer be the only consideration when an employee is thinking about accepting a job, so employers are taking a more proactive approach to attract and retain a good workforce, including offering a 401(k) plan.

The days of depending on Social Security to get individuals through their golden years seem a bit uncertain, so employees are looking for ways to supplement their retirement. According to the Profit Sharing/401(k) Council of America, 400,000 companies in the United States are participating in 401(k) plans, 42 million employees are saving for their retirement through 401(k) plans, and 1.9 trillion dollars have been invested in these plans.

PSCA defines 401(k) plans as a defined contribution plan that enables employees to choose between receiving current compensation and making a pretax contribution to an account through a salary reduction agreement. Essentially employees can have a set amount of funds deducted from their pay on a pretax base. The pretax deductions allow for a faster accumulation of funds, effectively lowering taxable income.

Researching Plans

Organizations have a fiduciary responsibility to provide reasonable fees and competitive performing accounts, so thorough research is traditionally necessary when choosing a plan. It is recommended that 401(k) administrators work closely with 401(k) companies and investment advisors to formulate the best plan feasible for employees and the employer.

The following are key factors to keep in mind when researching 401(k) plans and 401(k) providers:

• Investment fees: These fees can be the largest part of the expense. However, they are not as obvious because they are calculated based on a percentage of the invested assets, which are typically deducted from the investment returns and are not always apparent on the statement.
• 401(k) administration fees: These involve record keeping, legal services, customer service, online access, transaction fees, and individual service fees for optional features such as early withdrawal.
• Account maintenance fees: This is determined by the amount of assets invested in a fund. These fees typically range widely depending on the complexity of the plan. Often a 401(k) company may "bundle" these services and pay the subcontracted institutions.
• High returns: Look for investment managers who actively research and monitor investments. Frequently there should be a correlation between time invested by a fund manager and fees.
• Sales charges: These are the transaction costs for buying and selling shares. Front-end load are the fees taken upfront, which can reduce the initial investment. Back-end load charges are taken when the shares are sold and are determined by how long the shares are kept. Some mutual funds have no-load funds but do charge continuing fees paid out of the fund.

401(k) Matching

Organizations are not required to match an employee's 401(k) contribution. If an organization does decide to match employee contributions, it has several options:

• Matching by providing company shares
• Cash match of 3 percent to 5 percent up to a certain amount of the asset value
• Multitiered company match up to a certain contribution level but decreasing for higher contributions
• Fixed monetary match

Vesting Periods

An organization should determine what the vesting period should be for their employees. Cliff vesting is the period of time employees must remain with a company before they can take the company matched funds with them at time of termination. The other option is a gradual vesting period in which employees are vested up to a certain percentage each year they are employed with the organization.