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|Subject: Follow-up to Other Choices||Date: 5/9/2003 2:55 PM|
|Author: dsemmler||Number: 36283 of 77293|
I had started a thread about a week ago regarding my choices for retirement savings. In that thread, I mentioned my employer commenting that all employees needed to participate in the plan otherwise there was no plan.
One of the responses was: An employer must OFFER a retirement plan to all employees that meet certain criteria: for example, the employer might require that you have been with the company for 6 months or a year before joining the plan.
But yes, one or ten who do not choose to participate does not mess it up for the others.
There can be a problem when those defined as "Highly compensated employees" participate with a much higher percentage of their income than the less compensated ones do, but that doesn't mean the plan can't operate at all.
So yes, it would be appropriate for you to have a conversation with your boss on the subject of setting up a plan.
Well, I talked to my employer and this is what he had to say.
It would be a SEP (Simplified Employee Pension) plan or a Money Purchase
Plan (a.k.a. profit-sharing).
There are other plans that would allow different employees to contribute
different percentage of their salaries (or nothing at all). They are
401(k) and different sorts of SEP plans. The problem is that all plans that allow flexible contributions require administration by an outside company, which imposes an annual administration fee of $2000-$3000 and higher. For 3 people willing to participate this translates into $1000 per year. If you contribute $12,000 per year into the plan, this means over 8% in management fees. It's a heavy front load. Of course, if you consider what you save on taxes, it may still seem like a good idea. However, you will have to eventually pay taxes when you start withdrawing money from the account.
Would you be willing to share the administrative fee, proportionally to
the amount of money that each person contributes? Let me know.
Can I please get thoughts on that response from my employer? As he mentioned, there are only three employees that were interested in participating in a retirement plan. Would it be prudent for me to pay 1/3 of the admin fees so that I can put more money away in a retirement plan other than the $6000 for DW and my IRA? Am I better off staying with the IRA accounts and investing the rest in a taxable account?
I am leaning towards declining because if I do the $12,000 into the retirement plan and pay a $1000 admin fee, that is all I can do. Last year I didn't qualify for a Roth IRA so I would then still have to do a taxable account. However, if I reduce my AGI by saving more pre-tax dollars, I may then qualify for a Roth. Basically, is the extra $6000 in a retirement plan worth paying my $1000 share of the admin fee? My gut instinct is no but maybe I am just not evaluating it properly.
I'm sorry if this isn't clear but it isn't very clear for me either. Any help or information would be greatly appreciated.
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