Types of Employer Plans

What are 401(k) Qualified Employer Plans?

They are governed by federal laws and guidelines in the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRS). Qualified plans must benefit all eligible employees, and the benefits under such Plans must be uniform and nondiscriminatory. If strict requirements are satisfied, an employer may deduct contributions to the Plan and an employee’s tax liability is deferred until Plan distribution are received (Code Sec.401).

What are 401(k) Non-Qualified Employer Plans?

Are maintained to provide supplemental deferred compensation to executives and key employees. Nonqualified Plans are not subject to many of the requirements applicable to qualified Plans and does not meet the requirements of Code Sec. 401. Nonqualified arrangements include excess benefit plans, “top-hat” plans, non-qualified stock options, phantom or shadow stock plans, stock appreciation rights (SARs), stock repurchase plans, golden parachutes, rabbi and secular trusts, and nonqualified annuities( ERISA Secs. 201(2), 301(a)(3), 401(a)(1) and 4021(b)(6)).

What are Profit Sharing Plans?

Allows the employer annually to determine how much to contribute to the Plan in cash or employer stock. An employer is not required to contribute to a profit-sharing plan every year. An employer does not establish a profit-sharing Plan, by making a single or occasional contribution out of profits for employees. According to the IRS, a profit-sharing Plan requires “recurring and substantial” contributions (IRS Reg. 1.401-1(b)(2)). The funds in a profit-sharing Plan must be allocated to participants in accordance with a definite predetermined formula, which is not subject to the discretion of the employer (IRS Reg. 1.401-1(b)(1)(ii)).

What are Thrift or Savings Plans?

A thrift or savings Plan is a hybrid retirement Plan to which employees contribute. Employer contributions are usually geared to the amounts that are contributed by the employees. The amount contributed by employees is subject to a limit, in order to prevent discrimination in favor of highly compensated employees. Even in cases where employee contributions are voluntary and not connected with benefits from employer contributions, there is a limit to the amount an employee may contribute. The employer contributions to a thrift or savings Plan are normally made on a “matching” basis. Typically, an employer’s contributions are set by the Plan as a fixed percentage of the employees contributions.

What are Tax-Sheltered Annuities (TSAs) or 403(b) Plan?

Is a deferred compensation retirement arrangement only for employees of public education systems, specific tax-exempt organizations, such as hospitals and non-profit groups. TSAs or a 403(b) Plan are funded primarily through salary reduction agreements under which employees reduce their salary by a fixed amount or forego a future increase in salary (Code Sec. 403(b);ERISA Reg. 2510.3-2(f)).


Am I Eligible For My Employer Plan?

Federal law allows employers to include certain groups of employees and exclude others from the retirement plan (Contract Employees, part-time employees working less than 1,000 hours, employees covered by a collective bargaining contract, may be excluded). Find out if you are in the group covered by your employer’s retirement Plan.  In addition, federal law set minimum requirements as to when an employee can begin to participate in the Plan; however, a Plan may be more generous. Depending on Plan Provisions, A Plan may require an employee to be at least 21 years old and have a year of service. However, Eligibility can be immediate upon Date of Hire, and some 401(k) plans enroll employees automatically. This means you will automatically become a participant in the Plan unless you opt out.

How Can I Enroll In My Employer Plan?

Participation is voluntary and eligible employees can enroll after receiving a “new hire kit” including Contribution election form, investment information, Beneficiary Designation form and PIN information. Some Plans enroll employees automatically, meaning you will automatically become a participant in the Plan unless you opt out. Under automatic enrollment the Plan will deduct a set contribution percentage from your paycheck and invest the contribution in a predetermined investment. Plans with automatic enrollment must provide you an opportunity once a year to change the contribution rate or to opt out of the Plan.

How Do I Contribute To My Employer Plan?

Depending on the Plan, you may choose to save from 1% up to the Plan Max of your 401 (k) Eligible Earnings, in increments of 1%. You may elect to save based on before–tax contributions, After–tax contributions or, a combination of both After–tax and Pre-tax. You may Increase, decrease or stop your contributions to the Plan.

Pre-Tax Contributions – Allows Employee to make Before-Tax contribution

After-Tax Contributions – May allow Employee to make After-Tax contribute

Employer-Matching Contributions FREE MONEY – Employer may contribute to the plan in the form of a matching contribution or a “discretionary” contribution based on profit

Forfeiture of Company Matching Contribution

If a participant leaves the company before becoming fully vested, the participant may forfeit all or a portion of the employer contributions and associated earnings. Plan provisions specify how and when non-vested balances are forfeited and used by the plan.


What Are Investment Options?

Participant chooses from an Employer-determined group of “core” investments. The employer provides a variety of investment options that are available so that you choose the mix that best meets your needs, including; Mutual Funds, Company Stock, Fixed Income Funds and Money Market Funds to name a few. Each option is distinct in its goal and strategy. Each carries a certain amount of risk. Investment Education is the Employees responsibility, but many plans make investment information available through the Internet, Customer Care Center, Voice Response Systems and RetirementAspirations.Com.

Can I Change My Investment Options?

Changing Your Investments Options

Investment Direction Change

Determines where future contributions and loan repayments should be invested.

IMPORTANT NOTE: This type of transaction has no effect on existing balances in the investment funds.

Fund Transfers

Moves Entire account balance or partial account balances directly FROM one investment fund TO another investment fund included in your companies 401 (k) family of funds. Advisable when the Fund is performing poorly.

Fund Reallocation

Move ALL the money in the 401(k) plan account balance, and re-distribute the account balance, in whole percentages, into NEWLY CHOSEN funds.

Can I Add Money To My Employer Plan?
  • Rollover

Employees may rollover money from another qualified plan (employer sponsored) or IRA (Individual Retirement Account). Plans are not required to accept rollovers. Some plans may limit in-bound rollovers to before-tax monies only.


How About Loans?

An agreement that allows a Plan participant to borrow account funds, within IRS & Plan limits, and repay the principal, with interest (yes- you pay yourself interest), back into their account.

Loan Repayments

Typically reinvested according to the current investment direction and reinvested to its original money types, even though it is deducted from the participant’s paycheck on an after-tax basis.

Can I Take A Withdrawal?

Regular or Ordinary withdrawal

Generally available only to active Plan participants. Plan sponsor chooses the money or contribution types available and establishes a withdrawal hierarchy Regular withdrawals are subject to the mandatory Federal income tax withholding of 20%, if not rolled over. Plan Participants under the age 59½, may be subject to an additional 10% penalty tax. State/local withholding may be required.

Hardship withdrawal

Plan participants with an immediate and heavy financial need and no reasonable access to money from other sources may be able to withdraw certain contributions from their 401(k) plan: Hardship Withdrawal Existence of Need: IRS regulations allow employers to determine the existence of need by:

IRS Safe Harbors (IRS Safe Harbor require 6-month suspension of employee contributions to the Plan), Facts & Circumstances (Plan rules allow for more lenient methods to determine the existence of need (pre-set or on a case-by-case basis))

Hardship Withdrawal Safe Harbor under the Internal Revenue Code:

  • Un-reimbursed medical expenses
  • Purchase of a primary residence
  • Post-secondary tuition for the next 12 months
  • Payment to prevent eviction from or foreclosure on the employee’s primary residence

Additional Reasons for Hardship May Include:

  • Basic transportation
  • Catastrophic losses
  • Funeral expenses


Age 59 ½ withdrawal

Active Plan participants age 59 ½ and older may take in-service withdrawals.

What Happens When I Leave My Employer?

Final Distributions: FULL payment of account balance to Plan participant after a “distributable event” Separation

(termination), Retirement, Disability, Death

Payment of Final Distributions: Because of a distributable event, the participant (or beneficiary) usually has the option to

take all or part of his vested account balance out of Plan, Leave all or part of his vested account balance in the Plan

Payment Options: 401(k) Payment Options include: Lump sum with direct rollover, Lump sum paid to participant, Installment payments, Annuity

Automatic Cash-out (If under $5,000, the Plan can cash out the Plan participant check – minus federal withholding – is in the mail, unless the Plan Participant rolls over the account balance prior to the deadline.



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Fees and Transparency

Why Consider Fees?

In a 401(k) plan, your account balance will determine the amount of retirement income you will receive from the plan. While contributions to your account and the earnings on your investments will increase your retirement income, fees and expenses paid by your plan may substantially reduce the growth in your account which will reduce your retirement income.

In recent years, there has been a dramatic increase in the number of investment options typically offered under 401(k) plans as well as the level and types of services provided to participants. These changes give today’s employees who direct their 401(k) investments greater opportunity than ever before to affect their retirement savings. As a participant you may welcome the variety of investment options and the additional services, but you may not be aware of their cost. The cumulative effect of the fees and expenses on your retirement savings can be substantial.

What Are 401(k) Plan Fees And Who Pays For Them?

If you want to know how fees affect your retirement savings, you will need to know about the different types of fees and expenses and the different ways in which they are charged.

401(k) plan fees and expenses generally fall under three categories.

Plan administration fees: For basic administrative services such as plan recordkeeping, accounting, legal and trustee services

These services are necessary for administering the plan as a whole and in the day-to-day operation of a 401(k) plan.

Investment fees: For investment management and other investment-related services

By far the largest component of 401(k) plan fees and expenses is associated with managing plan investments. You should pay attention to these fees. You pay for them in the form of an indirect charge against your account because they are deducted directly from your investment returns. Your net total return is your return after these fees have been deducted.

Individual service fees: Associated with optional features offered under a 401(k) plan

These are charged separately to the accounts of participants who choose to take advantage of a particular plan feature.

What Fees Are Associated With My Investment Choices In A 401(k) Plan?

Apart from fees charged for administration of the plan itself, there are three basic types of fines that may be charged in connection with investment options in a 401(k) plan. These fees, which can be referred to by different terms, include:

  • Sales charges (also known as loads or commissions) are transaction costs for buying and selling of shares.They may be computed in different ways, depending upon the particular investment product.
  • Management fees (also known as investment advisory fees or account maintenance fees) are ongoing charges for managing the assets of the investment fund. They are generally stated as a percentage of the amount of assets invested in the fund. Sometimes management fees may be used to cover administrative expenses. You should know that the level of management fees can vary widely, depending on the investment manager and the nature of the investment product. Investment products that require significant management, research and monitoring services generally will have higher fees.
  • Other fees cover services such as recordkeeping, furnishing statements, toll-free telephone numbers and investment advice, involved in the day-to-day management of investment products. They may be stated either as a flat fee or as a percentage of the amount of assets invested in the fund.

In addition, there are some fees that are unique to specific types of investments.

What Are Some Common Investments And Their Related Fees?

Most investments offered under 401(k) plans today pool the money of a large number of individual investors. Pooling money makes it possible for individual participants to diversify investments, to benefit from economics of scale and to lower their transaction costs. These funds may invest in stocks, bonds, real estate and other investments.

While the investments described below are common, 401(k) plans also may offer other investments which are not described here (such as employer securities).

Mutual funds pool and invest the money of many people. Each investor owns shares in the mutual fund that represents a part of the mutual fund’s holdings. The portfolio of securities held by a mutual fund is managed by a professional investment adviser following a specific investment policy.

In addition to investment management and administration fees, you may find these fees:

  • Front-end load: Sales charges paid when you invest in a fund, which is deducted up front and, therefore, reduces the amount of your initial investment
  • Back-end load, differed sales charge, or redemption fee: Sales charge paid when you sell shares and is determined by how long you keep your investment
  • Rules 12b-1 fees: Ongoing fees paid out of funds assets which may be used to pay for commissions to broker and other salespersons, to pay for advertising and other cost of promoting the fund to investors and to pay various service providers of a 401(k) plan pursuant to a bundled services arrangement
  • Target date retirement funds: These are often mutual funds, hold stocks, bonds, and cash investments. These funds are designed to make investing for retirement more convenient by automatically changing your investment mix or asset allocation over time. Target date funds may charge different fees even with the same target date. If a target date fund invests in other mutual funds, fees may be charged by both the target date fund and the other funds.

Collective investment funds are trust funds managed by a bank or trust company that pools investments of 401(k) plans and other similar investors. Each investor has a proportionate interest in the trust fund assets. Like mutual funds, collective investment funds may have different investment objectives.

There are investment management and administrative fees associated with a collective investment fund.

Variable annuities are contracts between an insurance company and an employer on behalf of a plan. The variable annuity contract “wraps” around investment options, often a number of mutual funds. Participants select from among the investment options offered, and the returns to their individual accounts vary with their choice of investments. Variable annuities also include one or more insurance elements, which are not present in other investment options. Generally, these elements include an annuity feature, interest and expense guarantees, and any death benefit provided during the term of the contract.

In addition to investment management fees and administrative fees, you may find these fees:

  • Insurance-related charges: associated with investment options that include an insurance component—include sales expenses, mortality risk charges and the cost of issuing and administering contracts
  • Surrender and transfer charges: fees an insurance company may charge when an employer terminates a contract before the term of the contract expires or if you withdraw an amount from the contract

Stable value funds are are common investment option that generally includes fixed income securities and one or more contracts issued by banks or insurance companies that provide protection of contributions invested (the principal) and accumulated interest, as well as a rate of return that ma bye fixed, linked to an index, or reset periodically based on the performance of the fund’s investments.

These funds may have investment management and other administrative fees associated with their operation.

Where Can I Get Information About The Fees And Expenses Charged To My 401(k) Plan?

If you have questions about the fees and expenses charged to your 401(k) plan, review the documents noted below or contact your plan administrator.

  • Your plan should provide information about your rights and responsibilities. This includes plan and investment-related information, including information about fees and expenses, that you need to make informed decisions about the management of your account. The investment-related information is provided in a format, such as a chart, that allows for comparison among the plan’s investment options. The plan should provide this information before you can direct investments for the first time and annual thereafter. You also will receive a statement with information on fees and expenses for administrative or individual services actually paid from your individual account at least quarterly. This statement does not include charges paid indirectly from the investment options you have chosen.
  • The plan’s summary plan description (SPD) will tell you what the plan provides and how it operates. It may tell you about the investments offered by your plan, the fees and expenses paid by the plan, and how those expenses are allocated among plan participants. A copy of the SPD is furnished to participants when they join a plan and then every 5 years if there are material modifications or every 10 years if there is no modification.
  • The plan’s annual report (Form 5500 series) contains information regarding the plan’s assets, liabilities, income and expenses and shows the aggregate administrative fees and other expenses paid by the plan. However, it will not show expenses deducted from investment results or fees and expenses paid by your individual account. You may examine the annual report for free online here. In general, the summary annual report, which summarizes the annual report information, is distributed each year.

You may also request copies of prospectuses or similar documents from your plan as well as financial statements to your plan, and share values for your plan’s investment options. In addition, you may want to consult the business section of major daily newspapers, business and financial publications, rating services, the business librarian at the public library, or the Internet. These sources will provide information and help you compare the performance and expenses of your investment options with other investments outside of your 401(k) plan.

What Other Factors Might Impact The Fees And Expenses Of My 401(k) Plan?
  • Funds that are “actively managed” (i.e. funds with an investment advisor who continuously researches, monitors, and actively trades the holdings of the fund to seek a higher return than the market) generally have higher fees. The higher fees are associated with the more active management provided and sales charges from the higher level of trading activity.
  • Funds that are “passively managed” generally have lower management fees. These funds seek to obtain the investment results of an established market index by duplicating the holdings included in the index. Thus, passively managed funds require little research or trading activity.
  • If the services and investment options under your plan are offered through a bundled program, then some or all of the costs of plan services may not be separately charged to the plan or to your employer.
  • Plans with more assets may be able to lower fees by using special funds or classes of stock in funds, which generally are sold to larger group investors. “Retail” or “brand name” funds, which are also marketed to individual and small group investors, tend to be listed in the newspaper daily and typically charge higher fees.
  • Optional features, such as participant loan programs and insurance benefits offered under variable annuity contracts, involve additional costs.
  • Retirement plans, such as 401(k) plans, are group plans. Therefore, your employer may not be able to accommodate each employee’s preferences for investment options or additional services.

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