What is a 401(k) Plan?





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Published on Jul 15, 2011

The 401(k) Plan has become the most widely recognized and utilized qualified retirement plan in the United States. Established as a subsection in 1978 to Internal Revenue Code (IRC) 401, signed into law on January 1, 1980, the allowance of deferral of income for tax purposes has made the 401(k) plan the retirement plan of that and subsequent generations of workers in America. In 1985 there were eight (8) million participants in 401(k) plans with over $100mm in assets. As of the end of 2010 that number had grown to 65 million participants with over $3.1 trillion in retirement assets. Only government plans ($4.4 trillion) and IRA investments ($4.7 trillion) surpass the deposits in 401(k) plans today.

With its ease to establish and maintain and its generous individual funding limits, $16,500 for an individual under age 50 and $22,000 for anyone age 50 and over, this is the go to plan for most employers today. When plan level limits of $49,000 per year exist, most employers are sold on its benefits. These plans can be cross-tested to allow for greater contributions to be made to older workers with less time to accumulate. 401(k)s are often paired with a Cash Balance plan to offer the maximum tax savings to an employer given todays contribution limits.

With the average worker today needing around $600,000 in retirement savings to adequately fund a retirement that may last 20-25 years, the ability to save is even more important. The costs to establish this kind of plan is extremely cost effective and virtually any business owner is a prospect. Once eligibility requirements are met, participation in the plan ensues. Employee deferrals are always 100% vested and if the plan is run with safe-harbor provisions, the safe-harbor contributions are also 100% vested. Vesting schedules can be utilized by employers for profit sharing and traditional match contributions as a control mechanism to reward employees tenure with the company. Effective 1/1/2006, Roth provisions could be added to a 401(k) plan allowing for after-tax savings to earn and grow tax free. The Roth contributions, however, are part of the individual 402(g) limit of $16,500 and are monitored by the plans third party administrator (TPA).

Individual participant investment is the dominant way these plans are invested and working with a vendor who can offer the right mix of investment options and can include a Qualified Default Investment Alternative (QDIA) is very important. Access to the account and the capability to make changes as needed or wanted are features that are important to the employer and participants. Investment options such as target-date funds, risk based portfolios, sector specific mutual funds, individually managed options and lifetime guaranteed accounts are part of the mix. Assisting the trustee and plan sponsor with their fiduciary responsibilities is also a factor to take into consideration considering all the participant disclosures that are required and impending fee disclosure coming in 2012. New plans can be established and existing plans can be analyzed to ensure your client has the right plan on the right platform for their needs.

Susan Hajek offers securities through Resource Horizons Group, L.L.C., Member FINRA/SIPC.
1350 Church Street Ext. NE, 3rd Floor, Marietta, GA 30060. Telephone 770-319-1970.
Resource Horizons Group, L.L.C. and Brokers Alliance, Inc. are not affiliated.

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