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Investing/Strategies / Retirement Investing
|Subject: Re: question about 401k||Date: 5/8/2001 2:15 AM|
|Author: Schauher||Number: 29527 of 77871|
>> By requiring employees to wait one year to join the plan, we eliminating paying all the summer temps the dollar for dollar
match and the discreationary amount. Our plan was designed to provide retirement benefits to the carreer employee, not the
summer temporary help, who only work for you for 1 or 2 months, then quite and take out in cash the money they have in the
I should think it would be possible to write a plan that lets employees contribute their own money right away, but also permits you to delay any matching funds or profit sharing until the 2nd year of employment.
Unfortunately, the approach taken by your plan provider seems more typical. The reason you mentioned (plus the cost of paperwork) is often cited. I'm simply wondering whether there are any other [better] reasons, because IMHO these two don't seem to be enough by themselves to require the one-year waiting period. Though I don't see this approach as 'mean-spirited' anymore, it still strikes me as an overly punitive solution to a simple problem.
First, the penalty: Your plan actually penalizes your career employees the most. To come work for you, employees must be willing to forego a year's worth of their 401k contributions. Over a lifetime, this could cost a lot. At the contribution limit of $10500, a year's contribution compounded over 30 years (@ 11% annual return) equates to roughly $240,000 before taxes.
This is the amount *not* available for retirement treatment, rollovers into other qualified plans, etc. Ouch.
(Admittedly this may overstate the amount of loss, as the employee could simply invest the same amount of money, after tax, into a taxable account. Assuming a marginal tax rate of ~35%, this equates to a principal amount of $6825, which - when invested over the same time & rate - yields ~$156,000 before taxes. This assumes no taxable events over the 30 years. The actual amount could be substantially smaller.)
As opposed to your short-time employees, who could be on to other jobs in 3 months, with firms that let them start contributing to their plans right away.
As to solving the actual problems: The idea is to keep matching contributions, which are designed for your long-term employees, from being paid to short-term employees. Perhaps vesting options could take care of this. The remaining argument (paperwork cost) could be alleviated by charging your short-timers for the cost of doing any paperwork. This would let you recover the costs of short-timers saving their money in the 401k (if any of them opt for this anyhow), and yet not cost your long-timers $240k of retirement savings.
Perhaps I'm overly sensitized to the issue because, in my line of work, average company lifetime is <5 years, and avg. employee stay (for successful employees!) is 12-18 months. It is also typical not to receive matching funds. This prevents an employee from ever catching up for the lost time, so to speak.
So the entitlement to save one's own money, every year, in a retirement account is vitally important.
Thanks rclyde, jrr7 & all (I know this post takes some patience to process).
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