As 401(k) plans have become more popular and plan participants have become increasingly responsible for making their own investment decisions with respect to their retirement, the Department of Labor (DOL) has become concerned that participants in self-directed 401(k) plans are not made fully aware of critically important information that will ensure that they make informed investment decisions. In particular the DOL is concerned that participants have every pertinent bit of information about their accounts including investment choices, fees, and expenses.
In an effort to ensure the likelihood that every participant will be provided this important information, the DOL issued new regulations that require self-directed 401(k) plans to provide detailed information to participants about the plan and its investments on a regular and periodic basis so that participants can make informed investment decisions.
If your company is sponsoring a self-directed 401(k) plan for your employees and is like most plans, you must ensure that your employees receive the initial annual disclosure no later than August 30, 2012. The first quarterly statement must be furnished no later than November 14, 2012 (for July through September).
Although the DOL had already passed a series of regulations regarding these disclosures employer compliance with the older regulations was voluntary, whereas the new disclosure rules are mandatory for all self-directed 401(k) plans. Even participants in plans that previously complied with the earlier disclosure rules will see some changes when the new regulations take effect. Perhaps the most important is that the plan participant will receive more detailed information about investment fees and expenses. Another change is that plan investment information must be provided in a chart, so that the plan participant will be better able to compare investment alternatives.
These new disclosure rules apply to 401(k) plans and other plans that allow participants to direct their own investments, however, they do not apply to IRAs, SEPs, or SIMPLE IRA plans.
IRAs vs. Qualified Plans
Retirement plans are usually either IRA-based (like SEPs and SIMPLE IRAs) or "qualified" (like 401(k)s, profit-sharing plans, and defined benefit plans). Qualified plans are generally more complicated and expensive to maintain than IRA-based plans because they have to comply with specific Internal Revenue Code and ERISA (the Employee Retirement IncomeSecurity Act of 1974) requirements in order to qualify for their tax benefits. Also, qualified plan assets must be held either in trust or by an insurance company. With IRA-based plans, your employees own (i.e., "vest" in) your contributions immediately. With qualified plans, you can generally require that your employees work a certain numbers of years before they vest.
Let's explore the merits of SEPs and Simple IRAs with the understanding that if the plan sponsor can keep fees low, these plans may actually be a better alternative for the corporation and the plan participant than their "qualified" sister plans.
Tax advantages of retirement plans
A retirement plan can have significant tax advantages:
- Your contributions are deductible when made (unless it's a Roth version)
- Money in the retirement program grows tax deferred (or, in the case of Roth accounts, potentially tax free)
- Plan assets aren't taxed to an employee until distributed from the plan (except in the case of a Roth version, in which case it is not taxed on distribution)
When deciding on which plan is right for you?
With an array of retirement plans to choose from, each with unique advantages and disadvantages, you'll need to clearly define your goals before attempting to choose a plan. For example, do you want:
- To maximize the amount you can save for your own retirement?
- A plan funded by employer contributions? By employee contributions? Both?
- A plan that allows you and your employees to make pretax and/or Roth contributions?
- The flexibility to skip employer contributions in some years?
- A plan with lowest costs? Easiest administration?
The answers to these questions can help guide you and your retirement professional to the plan (or combination of plans) most appropriate for you.
So, what do your take away from this?
- It is critically important in these litigious times that employers are aware of exactly what retirement plan is most appropriate for their company and their employees.
- The employer must understand and take seriously his/her fiduciary responsibility to educate the employee and provide them every bit of information they need to make informed retirement investment decisions.
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David Katz is the Chief Financial Officer of Gitterman & Associates Wealth Management a financial and wealth planning firm located in Boca Raton. David can be reached at 561-826-9341
Securities Offered through Triad Advisors Inc. Member FINRA/SIPC
Investment Advisory Services offered through Gitterman & Associates Wealth Management, LLC, a Registered Investment Advisor which is notaffiliated with Triad Advisors Inc.
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