Have you ever wanted to ask good questions about your company’s retirement plan, but didn’t know where to start? Have you ever felt like you would be able to ask good questions if you first received some more information? In either case, you’ll find the following five questions loaded with valuable information about retirement plans in general which will build your confidence and enable you to ask informed questions about employer-sponsored retirement plans. Let’s get started!
Can I roll my account balance from a previous employer’s retirement plan before I satisfy the eligibility requirements?
In most cases, the answer to this question is yes. To confirm, the employer will need to either consult the plan document or ask their Third Party Administration (TPA) firm. By the way, this is one of those questions the TPA loves to answer because they are fairly straight-forward compared to other more complex, regulatory questions. But the question remains, should you roll over your account balance? The answer to that question really depends on your particular scenario. To aid this discussion, let’s consider a few examples.Example #1:
Suppose the company’s retirement plan has set an age requirement of 21 and a service requirement of 1 year of service with 1000 hours worked during that time. These are fairly common requirements across all industries and businesses of all sizes. The age requirement has been met, but not the service requirement of working a full year for the new employer. Additionally, the former employer does not have a profit-sharing feature in their retirement plan. In other words, the account balance will only change due to market fluctuations rather than due to the addition of employer contributions. The new employer is committed to the new employee who also intends to work for them beyond one year. In this case, it would be best to/my recommendation would be to roll the account balance over to the new employer before satisfying the eligibility requirements. Doing so will make it far easier to keep track as a single account balance at one recordkeeper rather than multiple accounts at multiple recordkeepers. Besides, depending on the balance, the former employer may end up moving the balance to a different recordkeeper entirely due to the power granted by the plan document. But that’s a different issue entirely.Example #2:
Assume the same specifications as above; however, in this case, the former employer has a profit-sharing feature in their plan. In other words, an additional contribution may be made to the retirement account after the last contribution from the employee. In this case, consider two factors: the distribution transaction costs and the time of year. It is common practice for TPAs and recordkeepers to assess a transaction fee for each distribution they process. If the profit-sharing contribution has not yet been made by the employer, two distribution fees are likely to be assessed – one for the current account balance and a second for the employer contribution that follows. If the employee does not mind being charged multiple transaction fees, then, by all means, initiate the distribution request prior to the employer’s contribution. If the intent is to be charged a single transaction fee, then wait until the former employer makes their contribution, then initiate the distribution request.Are there enrollment windows for retirement plans like other employer benefits plans?
No, there are no enrollment windows for retirement plans. Once the eligibility requirements for a plan are satisfied, an employee will be able to enter the plan upon the next entry date. Most plans use a dual entry feature which means an employee enters the plan on the first day of the plan year or on the first day of the seventh month of the plan year. For calendar year plans, the two entry dates would be: January 1st and July 1st.I know there are plan entry dates. But are there also plan exit dates?
There is no such thing as an “exit date” for retirement plans. However, there are two similar situations that are related to “exiting” a plan. They are: (1) ceasing contributions to the plan while still being employed and (2) being terminated from your employer entirely. An employee is always able to reduce their contribution levels to 0% at any time, regardless what the deferral percentage change frequency is as stated in the plan document. This allows employees to reduce their percentage to 0%, if they decide against contributing to the retirement plan for one reason or another. If an employee is terminated from a retirement plan, they are said to have experienced a “qualifying event”. In layman’s terms, a qualifying event is one that allows employees to move money from their retirement account without being assessed an early withdrawal penalty. Examples of qualify events are: being terminated, becoming disabled, or a plan terminating.What’s the benefit of participating in an employer retirement plan if I already have an IRA?
Two of the main reasons why you should participant in your employer’s retirement plan regardless if you already have an IRA are: (1) higher contribution limits and (2) the potential to receive additional employer contributions in your account. Let’s consider each of these reasons separately.Higher Contribution Limits:
In a qualified retirement account, an employee who is under the age of 50 may contribute up to $19,500 to their employer’s retirement plan. For those employees who are 50 or older, they may contribute an additional $6,500, bringing the total contribution amount for the 2020 calendar year to $26,000. Now compare this to the Individual Retirement Account (IRA) limit of $6,000 with an additional catch-up amount of $1,000. Participating in a retirement plan allows you to contribute between $13,500 to $19,000 more per year than a personal IRA. Remember, you do not have to reach this retirement plan limit in order to benefit from it. You only need to contribute more than $6,000 per year for employees under the age of 50 and more than $7,000 for employees older than age 50. Keep this chart as a reminder of this contribution limit benefit for 401(k)s in 2017-2020.
