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My husband is about to start a new job and they told him he
cannot contribute to a 401k until the 1st quarter beginning
after his first year of employment with them. Do we have to
wait that long? Should we negotiate?
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Greetings, emorlote, and welcome. You asked:

My husband is about to start a new job and they told him he
cannot contribute to a 401k until the 1st quarter beginning
after his first year of employment with them. Do we have to
wait that long? Should we negotiate?


Sorry, but unless that firm is willing to and does modify its plan document to eliminate the waiting period, then he will have to wait until he is eligible to participate in that plan. The plan document rules that issue.

Regards..Pixy
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Thanks pixy. Ugh!
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emorlote
Post 29464
Do we have to wait that long?


These are requirements that are written into the plan documents and the requirements you mention are quite common in plans. The plan I'm enrolled in has these identical requirements. Their is probably no room for negotiating, because plan sponsors are not allowed to deviate, to do so would be discrimatory in nature and would subject the plan to becoming a non-approved plan.
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When I was interviewing for my current job, I was told "there's a one year waiting period before you can enter our retirement plan." One year later I asked again and was told "Sorry, because you were hired in February it's actually a 16-month waiting period." 4 months later they only put $500 into my account. I complained about this and they said "Sorry, we only put money into the account at the end of the year." So I ended up waiting 22 months to actually start in the program! HR was very apologetic but was not about to negotiate.
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>> Sorry, but unless that firm is willing to and does modify its plan document to eliminate the waiting period, then he will have to wait until he is eligible to participate in that plan. The plan document rules that issue. <<

I know these types of plan documents exist (having been at such an employer myself once), but what is the advantage employers gain by doing this? I understand if they don't want to contribute matching funds, but why prevent people from saving their own money for the first year (or 22 months)?

(Sorry...it just seems outrageous to effectively erase a full year+ of someone's potential tax-deferred savings for no apparent reason. It's not even a vesting issue or implied penalty for quick employee turnover at a given company, since its effect is applied equally to all employees of that company, even the "loyal" ones.)

Is there any conceivable benefit to the employer by preventing 401k savings through such plan documents, or is it just mean-spirited?

(Thanks in advance! Sorry, I'm a little torqued)
--Rob
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Hi Schauher:
You asked in post 29483:
Is there any conceivable benefit to the employer by preventing 401k savings.....

I'm not expert, but from my own experience in setting up a 401k Pension Plan, there was a very logical reason to put in a one year qualification date.

I'm in the construction industry and we have a large turnover in employees. We match dollar for dollar, up to 5% and also have a discreationary amount (profit sharing)of another 5%.

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 plan.

We also put in a 5 year clift vesting schedule, with the idea that if they work 3 or 4 years, the have a tremendous incentive to remain with us.

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Rob,

There is a nontrival cost (in time, money, and paperwork) to add a new employee to the plan. The company decided that people who are going to quit are more likely to quit between hiring and 1 year than between 1 year and 2 years. So they avoid signing up people for the plan who are likely to quit.
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>> 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
plan. <<

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).
--Rob
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True, these provisions are written into the plan. HOWEVER, 401(k) type plans are often governed by a committee consisting of upper members of a company (at least that's the way we're set up). In plan documents that I've read for company sponsored financial vehicles, I have often seen a clause/paragraph which gives the governing committee substantial leeway in addressing plan issues with individual employees (probably set up as an escape route for special handling of upper level employee types).

Every company and every plan is different, but the general environment around my company is that there is substantial leeway in the various plans (401(k), stock options, deferred compensation, health benefits, etc.) for getting around the "irritation" factor of waiting for entry. In general, you have to be the right person or get ahold of the right document.

You might ask for a full copy of the plan and flip through it. I have been totally amazed at the difference between the babble put out by our employee services group and the way a plan "really" works. Sometimes, the employee services group has just been flat wrong on several key issues.

Keep in mind that I'm not saying that what you've been told is wrong. I'm just saying that reading the right documents can go a long, long, way.

Regards,
LooseChange
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