The future of the 401(k)

No matter what point you are at in your
career, it’s always a good time to plan
for the future. All employees need to adequately plan for retirement, no matter
how much they earn. Yet, while most people know they need to be prepared for
retirement, many people don’t know how
to properly prepare.

Several options are available to employees, such as pension plans, 401(k) plans
and IRAs. Luckily, more and more employers are taking an active role in retirement
plans, offering new and redesigned plans
to help employees prepare for tomorrow
and beyond.

“Retirement plans take a lot of time and
effort — from both employees and employers — but when they’re done right, they
can have amazing results,” says Dale R.
Vlasek, a member and chair of the
Employee Benefits Practice Group of
McDonald Hopkins LLC.

Smart Business spoke with Vlasek about
the future of retirement plans and what
employers and employees can do to maximize their golden years.

Is there something wrong with 401(k) plans?

That is something that has been debated
lately, but, for what they are, 401(k) plans
are good programs. The issue is that all
retirement plans are subject to various
nondiscrimination rules and regulations.
By law, employees are split into two
groups: highly compensated employees
[those who own more than 5 percent of the
company or earn over $100,000 per year]
and nonhighly compensated employees
[everyone else].

The issue concerning 401(k) plans is that
there is a limit to how much money highly
compensated employees can put into
401(k) plans, based on how much money
the nonhighly compensated employees put
in it. In simple terms, we’re looking at a
spread of about 2 percent. So, if, on average, nonhighly compensated employees
put in 3 percent, then highly compensated
employees, on average, can put away 5 percent. The major issue is that, generally,
nonhighly compensated employees usually don’t have a lot of disposable income, so
they can’t afford to put a lot into 401(k)
plans. This then limits a highly compensated employee’s ability to save.

Is it possible for employees or employers to
contribute more money to retirement plans?

There are good ways for employers to get
employees to contribute more, such as
automatic enrollment, where all employees are enrolled in 401(k) plans no matter
what. There are also ways to design plans
so that designated executives or employees can contribute more to 401(k) plans.

In 2007, the largest amount of money that
can be contributed to a 401(k) plan, as a
combination of employee and employer
contributions and any forfeitures, is
$45,000 or 100 percent of pay — whichever
is lower. But, employers can design programs that say they’ll give a certain
employee a $45,000 contribution, so the
employee doesn’t have to contribute anything. This can be a wise use of company
dollars, because you can take care of your
highly compensated employees without
worrying about how much the nonhighly
compensated employees are contributing to their 401(k) plans. Of course, the discrimination rules would require contributions to nonhighly compensated employees. But, with proper design, the cost of
those contributions can be kept at affordable levels for employers.

Is there a place for defined benefit pension
plans in the 21st century?

Absolutely. In fact, the only way to put
more money in a 401(k) plan, above the
$45,000, is through defined benefit plans.
You hear a lot today that defined benefit
plans are dead. And for a lot of blue-collar
workers, that may be true, but there is still
a place for them. For instance, the formula
of a defined benefit plan is designed to give
an employee a sum of money when he or
she reaches retirement age, let’s say age 65.
Generally, a retirement plan needs to have
$1 million in it for the employee to retire
comfortably. So, if employees start a plan
when they are 20, they have 45 years to get
that million. But, if they start when they are
50, they only have 15 years. Defined benefit plans will give those 50-year-olds the
ability to put away a lot of money in a short
amount of time. Besides benefiting the
employees, defined benefit plans help companies because they can provide even
more retirement benefits, without violating
401(k) laws.

Where else can you use these more sophisticated plans?

You can use these plans as ways for
employees to shelter additional dollars, so
they can adequately prepare for retirement. Also, you can structure defined benefit plans so that, for instance, when a son
is buying out a father, part of the purchase
price, if you will, can be a defined benefit
plan that takes care of the parents in the
future. That way, a company gets paid for,
or a portion of it gets paid for, with tax-deductible dollars.

DALE R. VLASEK is a member and chair of the Employee
Benefits Practice Group of McDonald Hopkins LLC. Reach him at
(216) 348-5452 or [email protected].