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.

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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.

dt

dt:

How long do you anticipate being with this employer? Will the administrative costs increase every year? If the numbers of participants increase/decrease, will the administrative costs be adjusted accordingly? Withdrawals will be taxed at your current income rate, (unless Congress changes that program). On the other hand, if you invest $13,000.00 on your own, you would have direct control over the type of investments you wish to choose and then be able to take advantage of the capital gain and loss rates (again, unless Congress changes that program). Crunch some numbers and create different senarios and see which is better for you. Food for thought.


reatta:)

How long do you anticipate being with this employer? Will the administrative costs increase every year? If the numbers of participants increase/decrease, will the administrative costs be adjusted accordingly?

Reatta,

Thanks foe the feedback. I think your first question is the one that is leading me to just keep investing on my own. My job is a contract position so there is not a lot of certainity to how long it will last. I started there last January on a 3 month contract and I am still there 15 months later. I am told that I have been budgeted for the entire year but you never know.

As far as your other questions, those are ones I will pose back to my employer just to be more informed on my decision. Thanks!

dt

SEPs require no outside administration. In fact there is nothing that is filed with the IRS. Your employer simply fills out Form 5305 for your records and the companies. There are several low cost providers, TDWATERHOUSE, AMERITRADE, ETC.

Money purchase plans do require outside administration and are subject to ERISA rules (govern retirement plans). I'm not an expert but it would not surprise me if it is against ERISA for an employee to bear the administrative costs.

Most importantly, money purchase & SEP plans are funded with employer contributions, a fixed percentage of each eligible employee's salary. An employee can not choose to not participate.
--> SEP the percentage can fluctuate.
--> MP percentage is fixed.

There are not different "types of SEP" anymore. SARSEPs can not longer be started, only existing ones can continue to be funded.

FWIW, SIMPLE-IRAs require little in the way of administrative costs, also. One can defer 8k in salary in 2003 in addition to funding a Roth.

buzman

Good advice.

>>SIMPLE-IRAs require little in the way of administrative costs, also.

Vanguard SIMPLE IRAs are great. My parents have them. Only problem is you can't combine them with your other TIRAs, so you end up with at least 4 accounts- Roth, TIRA, Taxable, and SIMPLE.

>>One can defer 8k in salary in 2003 in addition to funding a Roth.

9K if over 50.

Nick

<<Only problem is you can't combine them with your other TIRAs>>

Not forever.

A SIMPLE be "rolled over" into a Traditional two years after one ceases employment with that particular employer.


buzman

FWIW, SIMPLE-IRAs require little in the way of administrative costs, also. One can defer 8k in salary in 2003 in addition to funding a Roth.

Can the SIMPLE-IRA be established if certain employees do not wish to participate?

That is the problem with the SEP and/or money purchase plan. There is one employee that does not wish to participate, therefore none of us can participate in those plans. Thus the question related to sharing the administrative costs of an alternate plan.

However, I mentioned in a previous post that this is a contract job so I am a little reluctant to start shelling out cash for a retirement plan in the event my contract is not renewed. Granted I started on a 3 month contract and I have been here a little over 15 months but you never know what may happen.

Thanks for the feedback.

dt

>>Can the SIMPLE-IRA be established if certain employees do not wish to participate?

You've spent a lot of time asking such questions over the past few weeks. Why not just give Vanguard a call and ask about the options for your company? They're friendly people.

Can the SIMPLE-IRA be established if certain employees do not wish to participate? Yes

A SIMPLE does allow for deferrals but there is no requirement that everyone participate. If they chose not to participate then the employer would not have to make a contribution for them.


That is the problem with the SEP and/or money purchase plan. There is one employee that does not wish to participate, therefore none of us can participate in those plans NOT TRUE

A SEP or money purchase is funded by EMPLOYER contributions. Hence, no deferrals, no need to ask if anyone wants to participate or not. As long that one person is not the boss. <GRIN>

If the recalcitrant person would rather have his contribution in salary then that is not allowed. The percentage has to be the same for everyone.

buzman

You've spent a lot of time asking such questions over the past few weeks. Why not just give Vanguard a call and ask about the options for your company? They're friendly people.

Partly because it is not my company and I don't know how the company has been established. I subcontract through this company, however it is on a W2 basis rather than a 1099. With the recent changes in status at my current client, I don't even know how many people my current company employs any more.

I would imagine these are some of the questions Vanguard or any other firm would ask in order to give details on the available plans.

dt

A SEP or money purchase is funded by EMPLOYER contributions. Hence, no deferrals, no need to ask if anyone wants to participate or not. As long that one person is not the boss. <GRIN>

Ok, now you have confused me. The reason my employer gave for not being able to do the SEP or money purchase was because one employee did not wish to contribute. It was my understanding that the contributions would be coming from the employees, not the employer.

I'll try and do some more research and call some companies such as Vanguard to investigate my options. Seems I have been asking too many questions....

Thanks for your help.

dt

Ok, now you have confused me. The reason my employer gave for not being able to do the SEP or money purchase was because one employee did not wish to contribute.

For the third time, your boss is wrong.

FWIW, many professionals predict money purchase plans are obsolete given the increased contribution limits due to EGTRRA '01. If you think this is confusing I "won't even go there".

Seems I have been asking too many questions.... Naaah, retirement planning is confusing for professionals, laymen tend to obfuscate matters to a greater degree.

To clarify matters, your boss is simply confused or does not want to fund a retirement plan.

buzman

To clarify matters, your boss is simply confused or does not want to fund a retirement plan.

This could easily be the case. My impression was that he was going to reduce our hourly rate and use the difference between our current rate and the "new" hourly rate to fund the SEP. So, technically the contribution would be coming from him but it was really our money. And this would explain the necessity to have all employees agree.

Given the uncertainty of the contract job and my confusion, I think I may stay with funding a TIRA for DW and me and then plunking the rest in a taxable account.

dt

I see things clearly now.

I agree funding an IRA is your best option.

Look at I-bonds, the interest is tax-deferred until maturity or until you redeem them. They are a low-cost method of savings. I mentioned the tax-deferred options (you can choose to pay tax on the interest as it accurs) plus they give you a fixed income allocation to your savings plan. www.savingsbonds.gov

Hope this helps.

buzman