401k Q & A
Through my membership in NAPFA, I received a press request from a reporter with MSN. The questions he posed were so good I though it would make a good blog post.
How can a person tell if their employer sponsored defined benefit plan is good?
Wow, a very subjective question. It is hard to make generalizations but the first place to look is the fees charged to participants. Many 401k providers "wrap" administrative and reporting fees into an "asset fee" or "annual maintenance charge" that are billed against the individual participants investments. While this is legal, a "best practice" is for the plan sponsor to pay these fees directly on behalf of the plan. It is a deductible item for the sponsor and allows better returns for the participants by lowering the expenses charged to their tax deferred account. Another area to examine is the total fees paid by participants, which include "asset fees" and the expenses of the investments a participant chooses to use in their account.
If not what can they do to remedy the situation?
Many employers are not aware of their options. The employer has made a financial commitment to their employees by offering the 401k, and they are almost always participants themselves. I am sure they want to offer the best plan they can. A good resource for plan sponsors is www.dol.gov/ebsa/fiduciaryeducation.html. Here sponsors can download booklets and forms to help them evaluate different 401k proposals.
Can you have a Traditional IRA if you have a 401k or 403b plan at work?
Yes, if you meet certain income limits. For single filers with modified adjusted gross income of $52,000 and under for joint filers with income of $83,000 and under if you participate, or income of $156,000 and under if your spouse is the participant, you can make fully deductible contributions. For single filers with MAGI between $52,000 and $62,000 and joint filers with MAGI between $83,000 and $103,000 if you are the participant and between $156,000 and $166,000 if your spouse is the participant you can make partially deductible contributions. Another option is a Roth IRA contribution which you can use if you would qualify for a fully or partially deductible Traditional IRA contribution.
How can a person tell if their employer sponsored defined benefit plan is good?
Wow, a very subjective question. It is hard to make generalizations but the first place to look is the fees charged to participants. Many 401k providers "wrap" administrative and reporting fees into an "asset fee" or "annual maintenance charge" that are billed against the individual participants investments. While this is legal, a "best practice" is for the plan sponsor to pay these fees directly on behalf of the plan. It is a deductible item for the sponsor and allows better returns for the participants by lowering the expenses charged to their tax deferred account. Another area to examine is the total fees paid by participants, which include "asset fees" and the expenses of the investments a participant chooses to use in their account.
If not what can they do to remedy the situation?
Many employers are not aware of their options. The employer has made a financial commitment to their employees by offering the 401k, and they are almost always participants themselves. I am sure they want to offer the best plan they can. A good resource for plan sponsors is www.dol.gov/ebsa/fiduciaryeducation.html. Here sponsors can download booklets and forms to help them evaluate different 401k proposals.
Can you have a Traditional IRA if you have a 401k or 403b plan at work?
Yes, if you meet certain income limits. For single filers with modified adjusted gross income of $52,000 and under for joint filers with income of $83,000 and under if you participate, or income of $156,000 and under if your spouse is the participant, you can make fully deductible contributions. For single filers with MAGI between $52,000 and $62,000 and joint filers with MAGI between $83,000 and $103,000 if you are the participant and between $156,000 and $166,000 if your spouse is the participant you can make partially deductible contributions. Another option is a Roth IRA contribution which you can use if you would qualify for a fully or partially deductible Traditional IRA contribution.
Labels: 401k, fiduciary, IRA, retirement plans
posted by Joe Taylor at 12:04 PM
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