Financial experts speculate that Americans will need a very high percentage of their pre-retirement money in order to live at the same standards once they stop working. Too many Americans live for the day and do not think about the day that will come. Employers have a vital role in supporting the security of American workers.

401(k)

401(k) plans have become more prevalent over the years. With a 401(k), employees can contribute a portion of their salary into the plan. Rather than receiving the money as part of their pay, the money is put into the employer's 401(k) plan.

401(k) plans vary, but many institutions and organizations sponsor prototypical plans to lessen the complexities of hosting them for individual employers.

There are many reasons why an employer would want to establish a 401(k) plan:

- To attract and maintain employees
- Participants can decide how much to contribute on a pre-taxed basis
- Employers gain a tax deduction based on their matched contributions
- Money contributed may grow through investment vehicles
- Contributions and earnings are not taxed (in most cases) until distributed
- 401(k) plans may allow participants to take benefits with them if they change businesses

Beginning a plan

An employer will have to decide on whether to initiate the plan themselves or to get help from a professional or financial institution to help create and maintain the plan. An employer will have to decide on a 401(k) plan that is most befitting to their business and employees.

Traditional 401(k) plan

With a traditional 401(k) plan, employers have the option to make contributions for all participants, match employees' contributions, or do both. Contributions can be aligned with a vesting schedule. The plan grants participants the option to make pre-taxed contributions. Benefits for all employees are appropriately proportioned.

A safe harbor 401(k) plan

This 401(k) plan involves employer contributions that are fully vested. This plan works well for businesses with highly compensated employees whose contributions would be otherwise limited with other 401(k) plans. Both traditional and safe harbor plans are offered to employers of any size and can serve in conjunction with other retirement plans.

SIMPLE 401(k) plan

This type of 401(k) is offered to employers with 100 or fewer employees who received at least $5000 for the previous calendar year. The employer is required to make contributions that are fully vested. Employees enrolled in a SIMPLE 401(k) plan cannot receive any other benefit or contributions under any other employer based plan.

Other considerations

The assets accrued by the plan must be placed in a trust fund. The fund must have at least one trustee to handle contributions, investments, and distributions. A record keeping system will monitor contributions, earnings and losses, plan investments, and distributions. An employer will want to organize information about the plan to give to their employees outlining the specifics and benefits in enrolling in the plan.

Functioning with the 401(k) plan

Once an employer has established a particular plan and employees have enrolled, the plan needs to be maintained. The employer can choose to engage in the maintenance process alone or seek the help of a consultant. The following are components of a 401(k) plan:

- Participation
- Contributions
- Vesting
- Nondiscrimination
- Investing 401(k) monies
- Fiduciary Responsibilities
- Disclosing Plan Information to Participants
- Reporting to Government Agencies
- Distributing Plan Benefits

Participation

A plan will include both rank-and-file employees and owners/managers. Some employees may be excluded from a 401(k) plan if:

- They are not at least the age of 21
- Have not completed a year of service
- They are covered by a collective bargaining agreement that does not warrant participation in the plan

Contributions

Each employer must decide whether or not to contribute (and how much) to the plan selected.

Traditional

An employer can either contribute a percentage of an employee's compensation (called a "nonelective" contribution) or match the amount the employee contributes. An employer also can exercise the option of contributing in both ways. With a traditional plan, an employer can change the amount of nonelective contributions each year.

Safe Harbor

An employer will match each eligible employee's contribution dollar for dollar. This is only permissible for up to 3 percent of the employee's compensation, and then the employer contributes $.50 for each dollar; yet, this is only allowed up to the limit of 5 percent of the employee's compensation. As an alternative, the employer can make a non elective contribution that is equal to 3 percent of compensation to each eligible employee's account. Each year an employer must choose to either match the contributions or make non elective contributions.

SIMPLE

Employer contributions to SIMPLE plans can take the form of matching up to 3 percent of employee pay or a non elective contribution of 2 percent of employee pay. An employer cannot devote anymore funds to the employee's plan nor can an employee participate in any other retirement plan.

Vesting

"Vesting" means that the money an employee has invested into a plan through salary deferrals cannot be forfeited. When an employee departs from employment, they are entitled to those funds and any gain or losses based on the investment. With SIMPLE and safe harbor plans, employer contributions are 100 percent vested. With a traditional plan, the employer's contributions become vested over a certain period of time according to the vesting schedule.

Nondiscrimination

401(k) tax benefits entail realizing they are offered to all employees. These requirements are referred to as non-discrimination rules. These rules are established in order to prevent differences between rank-and-file employees and owners/managers.

Investing 401(k) monies

An employer will have to decide how to invest the monies accrued by the 401(k) investments. The employer may decide to give employees the option to place their monies where they choose or handle the investing for them. Whether exercising either option, an employer may want to seek the consultation of a professional to discuss what investment options should be presented to employees or how to invest the monies to optimally benefit employees and the business.

Fiduciary Obligations

There is great responsibility mutually inclusive with handling the shared funds of employees. One must be very careful in deciding who to trust in monitoring and handling the 401(k) funds. Some decisions such as choosing to have a plan, choosing a plan, including features of a plan, and terminating a plan can be labeled as business decisions instead of fiduciary ones because they relate directly to the welfare of the business. A fiduciary's responsibilities may include:

- Acting in the interest of all participants
- Exercising duties with care, skill, prudence, and diligence
- Following all guidelines - Diversifying investments

A person or persons handling plan funds or plan property must be covered by a fidelity bond to protect the fund against fraud.

Disclosing plan information

Documents divulging plan information keeps participants informed, alerts them of changes, and provides them with an opportunity to make aware decisions. A summary plan description (SPD) explains the logistics of the plan for the employee. The SPD must include information about:

- When and how to become eligible
- Particularities about contributions to the plan
- How long it will take to become vested
- When they will be eligible to receive their benefits
- How to file a claim for their benefits
- Basic rights and responsibilities participants have under the federal retirement law

SPDs must be redistributed periodically through the life of the plan and especially when modifications are made.

Distributing plan benefits

When participants are eligible to receive their distributions, they can elect to:

- Take a large lump sum of their money
- Roll over their account into an IRA or another employer retirement plan
- Purchase an annuity

Terminating a plan

An employer has the ability to terminate the 401(k) when it no longer suits the needs of their business. The plan's documents need to be amended, assets need to be distributed, and the filing of a final Form 5500 needs to be executed.

Analyzing fees

401(k) plans entail fees that will have an impact on your account balance. There has never been a time where one has so many options in handling their 401(k) plan; and, employers and employees should be aware of the fees and the expenses paid by their plan. 401(k) plan fees generally are cataloged into three categories:

Plan Administration fees

Daily operation of a 401(k) plan involves record keeping, accounting, and legal and trustee services (to name a few). Administrative fees may be covered by investment fees subtracted from income on investment returns. Administrative costs may be paid by the employer or charged against assets of the plan. If paid by the plan, the fees will be subtracted from individual accounts in proportion to their balance (which means that those with higher balances will pay more for the fees). The fees can also be paid as a flat fee in relation to each participant's account. The more services provided to the account, the higher the fees will be.

Investment fees

The largest fees come from managing the plan's investments. These fees are generally determined as a percentage of assets invested. They are paid for in the form of an indirect charge because they are subtracted directly from investment returns. A participant's net total return is assessed after these fees have been deducted. Participants need to be aware of these fees because they are not specifically pointed out on statements and may not be completely apparent.

Individual Service fees

There may be individual service fees applied to accounts in conjunction with general administrative expenses. These service fees are applied separately to participants who choose certain features.

Fees may be "unbundled" (providers such as investment manager, trustee, record keeper, etc. are paid separately) or "bundled" (one provider is paid and they dispense the money to any service provider involved).

Getting information about fees and expenses

The plan administrator should be able to direct all participants to understanding of all fees and expenses. They provide documentation describing fees associated with the plan. The administrator also provides descriptions of any transaction fees and expenses relating to the balance.

An account statement will show total assets in your account, how they are invested, increases and decreases during the statement period, and may show administrative expenses as well. Account statements are provided once a year or as otherwise stipulated. The summary plan description may tell you if administrative expenses are paid by the plan rather than the employer and how the fees are allocated amongst the participants. The SPD is granted to participants upon joining a plan and every five years if there are modifications or every ten if there are no modifications.

A plan's annual report contains information in relation to the plan's assets, liabilities, income, and expenses, as well as showing the aggregated administrative fees and other expenses paid by the plan. It does not show expenses deducted from investment results or fees and expenses paid by a participant's individual account nor does it show fees paid by the employer. The summary annual report is distributed each year.

Checklist

The following is designed to serve as a quick reference for those establishing a 401(k) plan:

- Have you determined which type of 401(k) will best serve your business and employees?
- Will you make contributions to the plan and if so, will they be matching or nonelective?
- Will you seek help with establishing and/or hosting the plan or do it yourself?
- Have you constructed a written plan showcasing the features you want to offer?
- Have you notified eligible employees and provided them with all necessary information?
- Have you arranged a trust fund for the assets or establish the plan with insurance contracts?
- Have you developed a record keeping system?
- Are you familiar with and have someone to handle fiduciary responsibilities?
- Will you monitor the plan's service providers (if not yourself)?v - Are you familiar with the reporting and disclosing requirements of the plan?

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