401(k)'s are a vastly popular company-sponsored pension plan.

They are fairly simple and straight-forward, they attract and retain personnel and contributions (elective deferrals) are made with pre-tax dollars.

The key, like any other investment opportunity, lies in the portfolio options, the managers, potential performance and receiving sound, independent advice on how to allocate your invested monies among the options available.

Elective Deferral

The U.S government established the 401(k) program in 1981 and with it included several special tax advantages - all designed to encourage people to save and prepare for retirement.

Under current law, 401(k) plan participants are allowed an annual deferral limit of $19,500 (plus another $6,500, if you are age 50 or older). 

As with most tax qualified pension plans, the advantages lie in the tax deferred status these assets retain under current law.

Secondly, the employer can elect to make contributions by matching all or portion of the contributions.

Please note that there are strict rules that employers must follow, including comprehensive record keeping and yearly non-discrimination tests.

Secondly, assets held under a 401(k) are generally not available until age 59-1/2 unless you are willing to pay IRS-imposed penalties.

However, there are certain circumstances that you can take early loans/withdrawals for such things as financial hardship, disability, first home purchase, post secondary educational funding, etc.

Legal Documentation

401(k) plans are established by the employer by adopting a written plan document. This document defines the legal responsibilities for all parties and provides all details of the terms therein.

The legal documents can be prototype documents or custom designed documents. The IRS should approve custom documents in advance.

Who is Eligible

Generally, the company sponsoring the plan outlines or chooses the eligibility requirements, but must adhere to certain federal standards. Such eligibility requirements might include age, years of service, vesting, etc.

401(k) Plan Administration

Often referred to as "TPA's" (third-party administrators), these groups provide the technical record keeping needed to keep these plans in compliance with the law. Their job is to monitor the plan and report all necessary activity to the IRS.

Although some companies simply choose to administer these plans internally, the greater the number of participants often times the better it is to use a TPA.

Therefore, what you will typically see in the marketplace is a turnkey or "bundled" approach whereby the 401(k) provider manages all aspects of the plan, including investment options, payroll deduction, accounting, annual testing (ADP & ACP), etc.

401(k)'s can be Good

401(k)'s can be a potentially valuable planning tool as it allows participants to defer compensation (through elective deferrals) and accumulate future earnings without current taxation.

Of course, like all tax qualified plans, taxes are due upon withdrawal and taxed as ordinary income. 

Action To Take

Click HERE if you are looking to establish a new 401(k) plan

Click HERE if you have an existing 401(k) plan and you are looking for a new plan provider and/or administrator

Click HERE if you have left your current employer and are looking for 401(k) Rollover options

For Faster Service Call 1-800-480-7526



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Copyright 1998 Fielder Financial Management, LTD.
All Rights Reserved.

Securities and investment advisory services offered through Fortune Financial Services, Inc. member FINRA, SIPC.
Fielder Financial Management, Ltd. not affiliated with Fortune Financial Services, Inc.  Mark Fielder, Financial Professional, CA. Insurance Lic. # 0690576.