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401(k)plans

The Need:

401(k) plans offer unmatched long-term savings potential, mostly because neither 401(k) contributions nor their earnings are subject to income tax during all the
wage-earning, contribution-making years the plan participant has until retirement. This deferred-tax status has a huge compounding effect: $150 per month put
into a typical savings account that pays 8% annual interest will grow to $42,034 by the end of 20 years (assuming a personal combined federal and state income
tax rate of 34%); in a 401(k), however, the same deposits earning the same rate of return will yield $88, 353! Even if that amount is taxed at the 34% rate when
the money is withdrawn from the plan (unlikely if the participant is in retirement), the 401(k) participant will walk away with more than $16,000 in "profit" just
for using the 401(k)!

401(k) plans also have the highest annual contribution ceiling of any of the tax-deferred savings vehicles (IRAs, SEPs, etc.); more money contributed,
equals more money earning money, equals more money in the account 20 years down the road. Add to this earning potential the convenience of
contributions being made through automatic payroll deduction and it's easy to see why 401(k) s are so popular.

A 401(k) plan, however, must be "sponsored" by an employer. Due largely to misinformation about the complexity of running a 401(k), coupled with a
general fear of the IRS and Department of Labor (both of which have regulatory power over the plans), many employers, especially at small and medium
sized companies, exclude this relatively inexpensive benefit from their employee benefits package.

Traditional 401(k) plan vendors did not think much about approaching these employers until very recently, when market saturation at the upper end of the
employment spectrum became so complete that vendors had to turn elsewhere to keep their companies growing. They have had years of practice at
educating employees about 401(k) participation and have produced some very helpful materials on the subject; participation is participation, whether it's in
a plan with 50 participants or 50,000. But the vendors have not demonstrated a real understanding of the small and medium-sized employer (those with one to
500 employees): the plans they have designed and the service packages they offer are not always appropriate in substance or style to the small and/or medium
sized company; the pamphlets and publications they have sponsored are often too dry, too legalistic and too expensive to have any widespread appeal. Perhaps it
is because most of these vendors are such large companies themselves that they seem to have difficulty designing 401(k) plan arrangements that embody the entrepreneurial, do-it-yourself, non-corporate spirit so prevalent in many small and medium-sized companies.

The bottom line is that neither the company heads nor the rank-and-file employees at more than 70% of today's small and medium sized companies are given the opportunity to take advantage of the 401(k)'s tremendous long-run savings potential.

The Solution:

401k Administration Made Easy tells employers the truth about 401(k) plans: they're easy to run; any company employee who possesses the basic traits and abilities we outlines is likely to make a good plan administrator; compliance problems are unlikely as long as a few, easy-to-do precautions are taken; employers don't have to make "matching contributions" (or any other kind of contributions) to the plan.

401k Administration Made Easy tell the in-house plan administrator the truth about running a 401(k) plan: here's how a plan is designed to run; here are your duties and this is how they relate to one another; here's how to do each of your duties; here are some pointers on how to plan ahead and thus safeguard your 401(k) from problems.

401k Administration Made Easy tells these things in a style and manner that dissipates fears and maximizes comprehension and real-world, everyday usefulness: friendly, no-jargon language is used; checklists, tables and worksheets (born of years of interacting successfully with 401(k) plan administrators and participants from companies of all sizes) keep information organized and in bite-sized pieces; graphics and summaries link concepts together; examples and analogies translate sometimes difficult to remember legal concepts into easily remembered scenarios.

Every copy of 401(k) Administrator Easy also includes a sample version of PSA's in-house plan administration software in convenient CD-ROM format. The software is a data base program, an accounting program and administration programs all rolled into one. It frees the plan administrator from much of the number crunching and report compiling, so the plan administrator can concentrate on serving the plan's participants and keeping the plan running smoothly. Software of this type tends to be especially useful in small and medium sized companies.

All in all, 401k Administration Made Easy gives companies (of any size) everything they need - and in a way they can use - to design and administer a 401(k) plan. And they get it all in about 375 pages and for less than the cost of most business lunches.

Chapter Summaries

The chapter summaries we have written for 401k Administration Made Easy are designed to be looked at in conjunction with our book outline. The outline states the main topics, facts and points the book will cover; the summaries explain how we will present those ideas, where and why.

Following the summaries ant the outline is a draft of a sample chapter (the Introduction). The artwork for the Introduction is far from complete, yet the draft gives an idea of the language, style and organizational presentation we envision for the book; it is an example of how a summary will be expanded into a chapter.

Introduction       (approximate length: 15 pages)

The introduction sets the stage for the concepts the book will discuss and how it will go about discussing them. The friendly, simple language, amusing, illustrative graphics and everyday life analogies tell readers this book was written for regular people: not for lawyers, accountants or computer geniuses, but for regular people. Regular people are the ones who tend to get saddled with 401(k) administration duties, especially in small companies, where a few people often have to wear many hats.

In addition to setting the stage in terms of language and style, the Introduction previews the book's framework: easily digestible blocks of information are presented first in checklists of topics to be covered at the start of each chapter, then again as slightly more in-depth discussion that flow point by point from the mini-checklists, all followed up by a brief review and summary of points made concluding each chapter. (The Introduction varies slightly from this format in that it does not contain an end-of-chapter summary.)

There are two key advantages to a narrowing preview-discussion-review format. First, it helps readers see the forest (or at least each section of the forest) before they go too deeply into looking at the individual trees (helping to keep them from being overwhelmed by all those trees). Second, it helps browsing readers locate information quickly yet in a way that lets them see related topics, too - suggesting that, hey, maybe they should take a look at some of these related topics. (Indexes, like the one we have at the back of the book, are handy for finding topics, but only if you know what it is, exactly, you're looking for; what, exactly, it is called.)

The information starts with a scenario of a 401(k) out of control. The scenario plays up to the horror stories that haunt boardrooms and lunchrooms about 401(k) plans going awry (at often huge financial and good-will costs to the company sponsoring the plan and great inconvenience to the plan participants; the IRS and Department of Labor are just two fingers that can grasp and claw at a plan caught out in the wilds of legal non-compliance). Images are tossed at the reader in both narrative and pictorial form, then, just as it is clear that no one with an inkling of sense would ever get involved with one of these 401(k) things, we throw out some numbers and comments as to 401(k)s' immense popularity among plan participants and sponsors. The key, it turns out, is knowledge, knowledge applied to planning. And lo and behold, at that very moment, the reader has his hands full of knowledge. The picture gets even brighter: the knowledge has been packaged within an extremely easy to read, easy to understand book and a CD of sample software. The knowledge is at hand. The map on how to apply it is at hand. There is light at the end of the tunnel (and it's reflecting off the bright yellow Dummies cover to light the readers' way)!

First up: what is a 401(k) - and hey, why would our government ever give money away like that (through tax breaks)? We talk about the dramatic need for retirement savings, the tentative future of social security, and then the compounding effect of saving money through a 401(k). These topics lead into a discussion of why an employer would want to sponsor a 401(k) plan for its company; hard and soft costs and benefits are mentioned, all of which are explored in detail within the book proper.

"Who Should Read This Book" is the next topic discussed. The bullet listing makes it easy for readers to skim for their category. (The categories are pretty comprehensive; the text even starts with, "Wow, that's a lot of people. But there can be a lot of people involved in the interworking of a single 401(k) plan...") The text talks about how important it is to understand how a 401(k) was designed to be run and with what intended results. It also goes into the critical role the in-house plan administrator plays in the plan's operation, and the reality that many administrators have little or no experience with 401(k) s when they're handed the reins of the company plan - a scary situation for everyone involved with the plan

"Why You Need This Book" is an extension of "Who Should Read This Book." It tells the reader what the people who need to read this book will gain from their efforts. The bullet points at the start make for quick emphasis; included is one silly point ("You need this book to tie onto your back when riding your bicycle at night so motorists can see you") just to make sure people are actually processing the words their eyes are seeing. The points made include: you need this book to effectively administer you company 401(k) plan; you need this book to save you (and your company) from unnecessary headaches and potential financial liabilities and disaster; you need this book to make user you employees look on the 401(k) as a quality plan.

The introduction mentions several ways in which company decision-makers and plan administrators will benefit from reading and using this book by touching on the regulatory nature of 401(k) plans as well as the penchant the Internal Revenue Service, which regulates the plans, has toward imposing heavy penalties for administrative mistakes and oversights. The introduction also talks about the many players necessarily included (by Internal Revenue Service mandate) in every 401(k) plan and the ongoing interaction that must take place among them - and how to make and keep that interaction smooth-running and efficient.

The introduction then explains that the book's authors have years and years of 401(k) management experience - and that they're making their sometimes hard-earned lessons on how to apply the 401(k) statutes readily accessible so more people headaches and financial heartaches too often involved.

Finally, the introduction mentions that the book comes with sample 401(k) administration software that helps make the plan administrator's job easier and more efficient. The introduction will be 10 to 15 pages long, depending on the artwork chosen to illustrate certain points, such as the difference between a well-maintained and thus smooth-running ("happy") 401(k) plan and one that has run into IRS-compliance or other problems.

Section A: Getting Started

We've organized the book's information into three tasks: Getting Started, Keeping Going and Choosing Your Plan's Providers, and have called them Sections A, B and C, respectively. (They're the A, B, and Cs of 401(k) administration.) They're followed by an Appendix that's a phone book of plan vendors and by a combination Glossary/Index. If feasible, we propose to tint the edges of each section's pages either a different shade or gray or the same shade but in a different place so it is easy to see without even opening the book that it is divided into sections.

Getting Started takes up the first four chapters of the book. Keeping Going takes up the next four, three of which explore in detail the plan administrator's duties and responsibilities while the fourth is a Q & A regarding the questions most commonly asked by employers (including plan administrators) and employees. Choosing Your Plan's Providers takes up three chapters; the Appendix and Glossary/Index are each a single "chapter."

Chapter 1       (approximate length: 30 pages)

We start the book by taking the reader through the most fundamental inquiry: is a 401(k) right for his or her company? It's a comprehensive assessment - although one surprisingly few companies ever consciously (and conscientiously) make. Thinking about the specifics involved in making the decision helps the company planner not only answer the basic question of, "Is a 401(k) the right plan for our company?" but also identify what options and characteristics the company needs in its retirement plan - whatever type of plan that may be. (The analysis is useful to plan administrators, too, and even employees have shown interest in this assessment.)

The chapter starts with a review and expansion of the fundamental concepts and definitions presented in the Introduction. (How many people, after all, actually read introductions?) IN particular, we go over what a 401(k) plan is and why a company might want to offer one.

Then we have readers take a mini-survey (in worksheet form that they mark up) to help them focus on that they want and need from a retirement savings plan before we shoe them what's available. The questions focus on three topics: the demographics of the company's workforce (including management and owners), retirement planning goals, and company budgetary goals and personnel limitations. The answers to these questions are applied throughout the ensuing comparison of retirement plans.

We begin the plan comparisons with a table of their characteristics. The five main cash or deferred arrangements (CODAs), which a 401(k) is, take up the bulk of the table; a general comparison of CODAs with traditional employer-sponsored retirement plans is a sidebar.

The table lets readers quickly scan the characteristics of the different types of plans, such as what vesting options each offers the employer, what IRS forms, if any, have to be filed each year, contribution limitations and ceilings, participant borrowing options, and employer contribution rule; the accompanying text explains each characteristic and the effect its presence or absence generally has on the sponsoring company and its employees.

This all helps the reader determine if a 401(k) is relatively attractive to the company in comparison to other types of retirement savings plans. We then ask if the 401(k) is absolutely attractive to the company: IN and of itself, is it something company employees will value, something they could benefit from, and is it something that fits the company's structure (physical as well as financial)?

How lawmakers envision 401(k) s to function is the first factor in determining suitability to a company. We run through a simple scenario of 401(k) operation (more detail on this topic comes in Chapter 2), then throw in some hitches to show variant routes to the same IRS-mandated end. Understanding how these plans are designed to run plays a big part in formulating and administering a plan that does run, that runs well. It also can reveal if a 401(k) and a company are compatible. We use the example of a law firm; law firms tend to have many "owners" in relation to number of employees which can cause problems in certain compliance tests. 401(k) compliance rules keep companies from designing a plan for and promoting it to only its more highly paid and highly ranked employees. Severe financial penalties can be levied for lack of adherence to such rules. We go into this subject matter in detail in Chapter 4, but here we show that even in a law firm, there are ways to offer a quality 401(k) plan.

The bottom line is that 401(k) plans can be adapted to almost any employment situation. We tell readers that, even if at first glance there's something in their company's makeup that seems to make it incompatible with a 401(k), just be patient and read on a little further. There's probably a solution - and it's probably pretty simple.

We then move into the benefits a company can reap from offering a 401(k) plan. The points range from the financial benefits of offering a 401(k) rather than a more costly alternative, to the goodwill gained from such an offering and the popularity of 401(k) plans among employees. A less commonly-voiced point is that sponsors currently have a lot of buying power in purchasing 401(k) services and can therefore get a lot for their investment by doing a little shopping around (we get to this specifically in Section C: Choosing Your Plan's Providers). Also touch on is that while administrative costs are the employer's to bear, much of the investment-related and plan provider-related cots can be passed on to plan participants.

Benefits only have bottom-line meaning when compared to their costs, which is the next topic for Chapter 1. We look at actual costs as well as next-best-alternative costs; we look at labor costs, vendor costs, supply costs and more, using analogies, examples and cartoon graphics to get the points across without adding "for counteracting insomnia" to the Introduction's list of What This Book Is Good For. We also ask the question of what would the plan administrator and any staff be doing if there were no 401(k) plan, and would that be better for the company.

Chapter 1 contains worksheets for readers to complete as they answer the various questions about their company and its needs. The information helps the, determine it a 401(k) plan is indeed right for their company. The worksheets are carried over into Chapter 2, where the company figures out the exact 401(k) plan most suitable to its needs.

Chapter 2       (approximate length: 30 pages)

Chapters 2 and 3 are sister chapters on determining the exact shape of the company's 401(k) plan. Chapter 2 tells the story of "Who does what." It introduces the components of a 401(k): the Internal Revenue Code/Internal Revenue Service, plan provider (which can be one or several parties), plan sponsor (the employer/company) and plan trustees; then it explains the role each plays in the 401(k)'s life and livelihood. Chapter 3 looks at, given everything that's decided by everyone else, what is left open for the plan sponsor (the employer) to decide and how those decisions affect the company plan.

Chapter 2 starts with a large chart summarizing who's responsible for what. The 401(k)'s component parts are listed along the top axis; the 401(k) component parties (IRC/IRS, plan provider and plan sponsor) are listed down the vertical; an entry in the intersecting box means the party has "that" to do with the 401(k). For instance, at the intersection of "participant eligibility requirements" and "plan sponsor" is the entry "sets age requirement and length of service requirement within above restrictions," the above restrictions being the entries in the IRC/IRS and plan provider boxes. (You can see how awkward this explanation is without having the reader looking at the chart! The chart layout makes a long, complex explanation unnecessary. All that's need is a definition of what the intersecting entries mean and explanation of how they shape a 401(k) plan.)
The chart has several important effects:

  • It gives a quick response to the "Who does what?" question.
  • It tells tentative plan sponsors who are worried that a 401(k) will be too much work for the company to handle, who are worried there are too many decisions to be made and that the company may not have anyone qualified to make them, that most of the "decisions" are already laid out for you - and that the ones that aren't are pretty simple (plus, they're got this great book to help make them!)It makes the things the Internet Revenue Code decides look helpful rather than intimidating, because they simplify what the employer has to decide.
Another important component to the framework of every 401(k) plan is ERISA: the Employee Retirement Income Security Act. ERISA is the cornerstone of employee benefits law, and it's a big player in the fear factor of why companies choose not to offer a 401(k) to their employees.

ERISA rules set the minimum standard of fiduciary conduct for 401(k) trustees, administrators and plan sponsors, in fact, for all decision-making parties involved in designing and providing a 401(k) plan. Because state and federal courts have interpreted several of ERISA's statutes (especially Title 1) rather broadly, with severe ramifications on plan sponsors and others, ERISA and its infamous "fiduciary responsibility" tag scare off as many would-be plan sponsors as does the idea of partnering up with the IRS. In discussing ERISA and its effects on 401(k) plans, we apply our methodology of presenting small blocks of easily digestible information at a time, explaining them through example and analogy, when appropriate, then linking the blocks together both graphically and verbally to dispel unwarranted fears and apprehension without oversimplifying the seriousness of ERISA's stipulations and admitted vagueness of some of its statutes.

Then, having tamed by having demystified the scary monsters of the 401(k) world (the IRS/Internal Revenue Code and ERISA), we move on to plan providers and how they shape a company plan. Their basic influences on a plan are apparent in the main chart. In expanding on that information, we explain the ways in which a plan provider can work within the Internet Revenue Code parameters to further reduce the choices a plan sponsors has to make for the company plan. For instance, the plan provider can limit the number and type of investments allowed. These limitations obviously influence the plan's ultimate character.

Only the ground rules set by law are laid in stone (an idea reinforced by the shading we use in the chart); those set by a plan provider are the choice of that provider, so if an employer doesn't like those rules it has the option of choosing a different plan provider. Choosing vendors to create and service the company 401(k) plan is addressed in detail in Chapters 10 and 11.

Chapter 3       (approximate length: 25 pages)

Chapter 3 considers the options open to an employer in designing its company 401(k). It begins with our disgruntled employee icon looming menacingly in halftone in the background as a reminder that although budgetary and personnel limitations are important in shaping a company 401(k), all will be for naught if the employees don't look on the final plan as a benefits and something they want to participate in. This is the predominant theme that visually and verbally appears throughout Chapter 3.

The employees' needs, expectations and financial outlook should be considered just as thoroughly as those of the company in designing (and administering) the company 401(k) plan. We've made a worksheet for readers to complete as they go through the optional components of a 401(k) to help them determine which are beneficial and sensible for their company to incorporate given the needs-budget-expectations criteria. (The authors will work with the publishers to determine the most cost- and use-effective means for including worksheet as well book. We've come up with a few ideas: (1) a tear-out copy of each worksheet as well as a copy that stays bound within the book and can be photocopied, (2) a bound copy that can be photocopied plus a computer version (we can use Acrobat or some other universally printable program) stored on the 401(k) Easy sample administration software CD-ROM that comes with each book, (3) merely a bound copy, or (4) merely a tear-out copy.)

Completing the worksheet starts with defining the company's evaluation criteria. Exactly what is it that the employees need in a retirement savings program? Decision-makers need to be at least basically aware of workforce demographics: Do the majority of the employees have five years, ten years or forty years left before retirement? If they stay with the company all that time, what will be their prospective income stream? Are most of them married? Do they have children (or plan to)? Especially if the company is large, we recommend that employers poll the employees (we provide a sample questionnaire), explaining that they are considering adding a 401(k) plan to the company benefits package and are interested in how much of a benefit this would be to employees and what services would be most important. Included in this survey would be a income and neefs analysis for each employee to make - another worksheet that comes with the book. The employee poll also helps the employer choose an investment portfolio mix that is consistent with employee needs. There are a lot of legal ramifications in talking with employees about financial matters, for which reason our "consult an expert" icon appears frequently in these discussions. The worksheets we include all have appropriate disclaimers regarding consulting a professional tax or other advisor. By the end of Chapter 3 the reader has completed the worksheets on 401(k) options; they're holding the recipes for the 401(k) plan most suited to their companies' and employees' needs, budgets and expectations.

Chapter 4       (approximate length: 25 pages)

Chapter 4 deals with the dark cloud that scares off so many would-be plan sponsors: the Internal Revenue Code's compliance rules. We apply our style and organizational skills in the production of list and graphics that demonstrate that as long as reasonable care is taken in administering a 401(k) plan and the plan is designed to be appealing to the employees (the lower paid "rank and file" as well as the managers and officers), it is unlikely that any compliance issues will ever arise. The key preventive measures are frequent testing to catch a problem in the bud (it should be part of normal monthly operations, just like forwarding the contributions to the appropriate mutual fund companies), quality service and marketing to encourage a diverse population of participants with a strong base of rank-and-file employees, and planning ahead.

There are two main compliance tests that every 401(k) plan must pass every year. Both have been designed as safeguards against employers designing plans that are appealing and marketed to only upper level employees (and company owners and officers). We explain each test in terms of what it is and what end it is designed to serve. Then we look at each in action. We present several scenarios to show how the propensity for a particular plan to pass or fail a test can be altered:

  • By changing one or more of the decisions the employer chose for the plan, such as the participant age or length of service eligibility requirements.
  • By restricting (within the rules) certain groups of employees from participation.
  • By more intensely "selling the plan" to the group(s) of employees from whom participation is needed (or needed at a more intense level) to improve plan compliance.
Chapter 7 looks specifically at the plan administrator's responsibilities to "sell the plan" and ways to go about fulfilling those responsibilities; here in Chapter 4 we examine the difference that selling the plan can make to the plan's health and livelihood.

In addition to the compliance tests, Chapter 4 talks about contribution ceilings. The company and its plan participants are limited in absolute and relative terms (relative to overall payroll and individual annual earnings, respectively) in how much money they can contribute to the 401(k) each year. As with compliance with participation ration rules, compliance with contribution ceilings is not something that should be left until the end of the year to look at: by that time, the problem, if it's going to be there, is already there - and there's no time left to make any corrective adjustments. It's already year-end! (And the penalties will be coming!) We again pick up the idea of contribution ceilings and the need for frequent compliance testing in Chapter 6, wherein we talk about the plan administrator's specific duties and how to do them; safeguarding against excess contributions, whether by frequent testing or other means, as well as going through the annoyances of returning excess, contributions and filing amended tax returns if the error is not caught early enough, fall under the plan administrator's jurisdiction.

Section 8: Keeping Going

Now that the readers understand 401(k) plans and how they're meant to function and have decided what they want for their company plan, they're ready to move into the specifics of 401(k) plan administration.

The plan administrator wears a lot of hats and fulfills a lot of duties. Too often a person, say from Human Resources, is thrown into the plan administrator position because he or she has some experience in an area similar to something demanded of the plan administrator. But this person has nothing to draw from in all the other areas! It's a problem that starts with the employer's not looking at all the qualifications its plan administrator will need to fulfill; it's a problem that will plague the plan's operation - unless the plan administrator is granted the saving grace of something like 401k Administration Made Easy!

We've separated the plan administrator's duties into three chapters. Chapter 5 is about the plan administrator as the link between the company employees and the plan. Chapter 6 is about the plan administrator as the financial switchboard operator for the plan. Chapter 7 is about the plan administrator as the plan's marketing and sales representative. Following these "duties" chapters is a Q & A of commonly asked questions by employers, plan administrators and employees and our responses to them.

Section B's chapters not only help the plan administrator with every day operations, they also help the company decision-maker who has to appoint a plan administrator. BY skimming the summaries and checklists in Section B, the decision-maker will gain a fair idea of what the plan will ask of its administrator.

Effective plan administration is part public relations, part office administration, and part salesmanship. Choosing a plan administrator (choosing each of your plan's vendors and in-house personnel) is addressed in Section C: Choosing Your Plan's Providers; but here in Chapters 5, 6 and 7 we look at the down and dirty of day-to-day plan administration.

Chapter 5       (approximate length: 45 pages)

Chapter 5 is the first in the trilogy of chapters explaining the plan administrator's duties and responsibilities, in detail, and how to fulfill them. It covers the things that relate to the plan administrator as the link between the company employees and the plan. This is an extremely critical role. How the plan administrator handles himself or herself in dealing with and serving the company employees has a tremendous effect on the success of the plan, both in terms of popularity and bottom-line compliance and financial success.

The 401(k) plan will not do anyone any good if it does not remain qualified, as discussed in Chapter 4; a plan falling out of compliance can be extremely costly to the employer, something which most employers are quite aware of (but possibly their plan administrators are not, or at least not in concrete terms).

We're big believers in the combination of visual and verbal messages; the juxtaposition of bad scenario-good scenario also can be very effective in bringing the message home. We open Chapter 5 with one of these scenario comparisons.

We introduce a negligent plan administrator who is lax about getting information to prospective and current plan participants on time and about acting on information received from them (a pattern that could foreshadow tardiness in forwarding contribution data and/or money, too, which has its own severe ramifications, something we talk about in Chapter 6). These can be very costly lapses: If plan participants aren't getting their information on time, they might become discouraged from participation; who, after all, wants to chase down and hound the plan administrator every time they need an enrollment form or some investment listing or anything concerning the plan! If participants are requesting information about changing their investment mix and incur financial losses because the plan administrator does not get back to them in a timely manner, they may charge that the plan administrator is neglecting that all too powerful and liability-laden but unclearly defined "fiduciary duty" that scares so many employers off ever offering a plan.

Then we have the "good" plan administrator, the one who doesn't miss deadlines, who gets forms and information out quickly, who acts quickly on requests and information as they come in. This administrator won't incur the added problems the lax administrator brought on. These scenario comparisons (which have some cartoon visual accompaniment) show the importance of a plan administrator's being readily accessible and diligent.

We then go into specifics. What, exactly, does this "link" role entail? We start with a checklist of things for which the plan administrator is responsible in terms of serving as the link between the employees and the plan, then address those things one by one, defining each and using examples to show how they're done.

Chapter 6       (approximate length: 45 pages)

Chapter 6 is the second in the trilogy of chapters explaining the plan administrator's duties and responsibilities and how to fulfill them. It covers the things that relate to the plan administrator as the financial switchboard operator.

Obviously, this is a critical role in the plan's health and operation. The administrator must make sure that all the right payroll information gets from the payroll department to the plan provider for contribution calculations; that the processed information gets back to the plan administration office; that the right checks in the right amounts are prepared for and signed by the plan trustee for each mutual fund investment company sponsoring an investment with the plan; that the contribution checks are forwarded appropriately to the mutual fund companies along with the appropriate roster to tell the mutual fund company how the amount should be allocated among the various plan participants' accounts; and that all this is done in a timely manner that does not exceed the time allocated by the Internal Revenue Code for these activities! The plan administrator could use at least forty pairs of eyes and forty pairs of hands to oversee all these things at once.

These duties scream flow chart (at least to us), so that's what we use. The flow chart lets the plan administrator see what has to be done - and when - and how the entire financial process is one long series of interconnected steps.

We actually use a couple of flow charts in Chapter 6. One centers on activities set in motion each payroll period; the other gives an annual overview of 401(k) plan operation (as you might guess, mini-versions of the former appear over and over within the latter). Then we go about explaining the activities that go on in each cell; a mini abridged version of the flow chart (just the cells, no text) appears in the margin next to the text with the cell we're talking about highlighted. In this fashion we explain each of the plan administrator's "financial switchboard" duties.

Chapter 7       (approximate length: 45 pages)

Chapter 7 is the final chapter in the trilogy explaining the plan administrator's duties and responsibilities and how to fulfill them. It covers the things that relate to the plan administrator as the plan's marketing and sales representative, again a critical role to the plan's health and success.

As with Chapters 5 and 6, we start with a checklist of things for which the plan administrator is responsible, in this case, things that pertain to the plan administrator's role of marketing and sales representative for the plan.

Arguably the most critical of the item on the list is the plan administrator's influence on the shape, substance and character of the enrollment meeting. An enrollment meeting can make or break a plan.

Luckily, we've been conducting very successful enrollment meetings for years. We know the things that work, the things audiences tend to respond to. For instance, meetings conducted during business hours usually have a much higher turnout than after-hours meetings. Slide shows and video presentations work well. Having a dynamic speaker can be critical. If the plan administrator is not a good public speaker and the plan provider is not willing to send a representative to lead the enrollment meeting, it can be well worth the effort to educate an in-house person who does speak well publicly to help out. We have lots of tips like these; we present them in lists and examples.

Being available to the employees does not end with the close of the enrollment meeting. The plan administrator must be readily accessible to employees and must at least appear to always have a handle on things. It's OK for a plan administrator to tell a plan participant he'll or she'll have to get back to them with the answer to their question, for example, but then that administrator must get back to them quickly. Expedient service (so long as it's not at the expense of quality) is highly rated by plan participants; we ingrain it into plan administrator with visual and verbal reminders.

We continue on down the checklist, explaining each item and its ramifications as we go. An example of something we haven't seen any other authors bring up (probably because many of them are sponsored by plan providers) is that the plan administrator has a duty to the plan participants to work with the plan provider to make sure the plan's forms and information materials are easy to understand, easy to complete and that they contain as little repetition of information requests as possible. The plan provider may not at first appreciate this meddling, but the plan administrator is there to serve the plan, to make sure it's the best plan possible, and forms that breed mistakes or misinformation because they're confusing or difficult to fill out will ultimately hurt the plan. (Asking a prospective plan provider for some sample literature and forms is something we suggest in Choosing Your Plan's Vendors, in Section C.)

Chapter 8       (approximate length: 20 pages)

Chapter 8 is question and answer chapter. We believe it is the chapter people are most likely to stop and look at when flipping through the book; its form and presentation must, therefore, represent the book well: as something that is readable, accurate, easy to understand and occasionally intentionally amusing.

Effective question-and-answer dialogues rely on how well the "experts" can interpret a question: what's apparent that the person already knows in asking the question, and what's apparent that the person does not yet know in not knowing the answer? We've had a lot of years of experience in working with plan participants, plan administrators, sponsoring employers and every other player in the 401(k) game. In fact, a fundamental role that we have played for nearly ten years is writing and designing effective communications for these people, communications that don't scare people off by being too long, too wordy or too technical but that still contain the necessary particulars to communicate the complete message.

We know that kind of questions come up, and we've learned how best to answer them. Some people respond to straightforward factual answers, others to explanation through analogy, others to visual, graphic representations and still others to a combination of tactics. We use whichever means provide the most effective answer.

Questions must be clear and their answers must promote immediate comprehension and retention of the information. Especially in the readership likely for 401k Administration Made Easy, readers want a quick answer. Either they're already in a fix or they're perusing the book and want to know if it'll be helpful in a crunch. Few readers have the desire (or the time) to read through paragraph after paragraph of explanation; they want the answer to be short, sweet and to the point.

We've divided the questions and answers into two sections: commonly-asked questions by employees and commonly-asked questions by employers, including plan administrators. We've subdivided those sections into basic Getting Started, Choosing Investments, Costs and Advantages of Participation/Plan Sponsorship, Your Plan Vendors, Fiduciary Responsibilities and Plan Compliance sections.

In the chapter's introductory section we also suggest people call up the 401(k) Easy website or that of any of the plan providers rated highly in Section C's Choosing Your Plan's Providers. Websites are convenient sources for up-to-date information, for things like current annual 401(k) contribution limits, which change every year. PSA's 401(k) Easy website as well as its corporate website can be additional marketing vehicles to promote 401k Administration Made Easy.

Section C: Choosing Your Plan's Providers

Section C covers hiring the right people and/or vendors for the company 401(k). We've divided the material into three chapters. Chapter 9 looks at selecting the right in-house personnel, in particular the plan's administrator but also any assistants and even the plan's trustees, if opting for in-house trustees. Chapters 10 and 11 get into the meat of selecting plan vendors: the plan provider/third party administrator, plan trustee (if going with an out-of-house trustee), investment provider(s)/manager(s), and more. Chapter 10 concentrates on vendors for bundled plans (plans that hire one company to fulfill all the vendor services) while Chapter 11 concentrates on staffing unbundled plans. Following the chapters is an appendix of contact information for various types of plan vendors.

Chapter 9       (approximate length: 10 pages)

Chapter 9 is a short-and-sweet chapter. There's some text, but mostly it is a series of very concise lists, checklists, charts and worksheets designed to home in on the duties the plan administrator must fulfill and qualities a successful plan administrator is likely to exhibit. This chapter is useful not only to the employer (in trying to choose a good plan administrator and any staff) but also to the plan administrator (in trying to understand the multi-faceted-ness of the job).

We take the responsibilities discussed in Chapters 5, 6 and 7 and use them in checklists and worksheets in Chapter 9. We ask the reader to remember that the plan administrator wears many hats: customer relations person, financial switchboard operator, plan marketing and sales representative. In the worksheets and related tables, we list the specific duties these roles entail (taken from lists already presented in Chapters 5, 6, and 7), then note qualities in a plan administrator likely to help fulfill these duties. "Qualities" can be explicit experience or general character traits, such as "punctual."

IN having the reader identify the qualities that are important for its plan administrator to possess, we also (sometimes within the same chart, sometimes through a separate exercise) have the reader weigh the importance of the different qualities as they pertain to the company's particular plan. For instance, the marketing and sales qualifications would be different for someone having to approach a few thousand employees than it would be in trying to deal with only a few dozen: a familiarity with commercial printing might come in handy in the former, but the latter would have to rely on much more small-scale approaches.

Most of Chapter 9's points are pretty basic, and it may seem incredible that anyone would not consider these things without our help. The thing is, they don't always consider them together. Too often a plan administrator is chosen simply because he or she fulfills one of the job's criteria. Our series of charts, exercises and worksheets help keep the definition of "plan administrator" clear, properly weighted in its components and close at hand.

Chapter 10       (approximate length: 20 pages)

Chapter 10 is another chapter comprised primarily of a few key lists, checklists, charts and worksheets, this time for the company to use in determining the best plan provider for its 401(k).

Chapter 10 compares vendors for "bundled" 401(k) plans. Bundled plans get the actual plan and its maintenance and services as well as investment and recordkeeping services form a single source, the plan provider. Bundled plans historically have been the preferred choice of plan sponsors; 61% of the 248 401(k) plans in place at the end of 1996 were fully bundled. This preference is due partly to lack of education about how to put together an unbundled plan, partly to lack of incentive (unless participants are screaming for better investment choices, the employer is unlikely to make the effort to change what's already being offered) and partly to the misconception that unbundling a plan equates to spending a whole lot of extra time policing and coordinating the different vendors. Chapter 11 explains how to going with an unbundled plan can be almost as "one-stop" as opting for a bundled one.

We begin the shopping process with the table of "Who Does What" that we introduced and talked at length about in Chapter 2; the table is slightly altered in that the cells relating to the things over which the plan administrator has power have been highlighted by magnification, while the other cells have been visually downplayed (but not so much that they aren't still readable). Having reminded the reader as to what the plan administrator can control and to what degree, we have the reader fill out a quick worksheet about what the company wants from its 401(k) plan; if its handy, the reader can use the similar one already completed in going through Chapters 3 and 4. Then we move into comparing those needs and desires with plan what providers and willing to offer - and for how much.

Our next table records the different offerings of 25 of the leading providers of bundled plans; included are things like basic fee schedules, investment offerings, compliance testing policies and loan and hardship withdrawal policies. We compare items that recent surveys show are most important to plan providers. We also note when relevant any differences in services to small, medium or large plans; accompanying text bring out positive and negative implications that certain service packages can have on a plan; for instance, some are not well suited to plans that have less than 50 participants because low-participation penalty fees (although the providers never call them this) will eat away at the plan.

Readers are sometimes merely told where in the book to turn for the complete discussion of a topic mentioned in the charts; at other times, a new explanation is warranted. We also make suggestions for evaluating potential vendors; for instance, the plan sponsor can ask for samples of forms and literature to make sure they are easy to read, easy to understand, easy to complete - that they represent the plan well and encourage participation. The plan relies heavily on the forms and literature supplied by the plan provider, and the plan administrator's marketing and communication duties are much simpler and easier if the plan administrator is given good materials to work with. Our suggestions for evaluating potential vendors are summed up in a checklist and accompanying worksheet for readers to complete in choosing the plan's provider.

Chapter 11       (approximate length: 20 pages)

Chapter 11 deals with the unbundled 401(k). A vendor offering a great deal on the 401(k) plan itself, its documentation and basic ongoing service, may not offer the most suitable investments, and vice versa. Just within investment providers, one provider might offer the best growth stocks, another the best bond mutual funds and still another the best international markets mutual funds. Today's 401(k) not just through the traditional vesting, matching contribution, etc. options provided by the Internal Revenue Code but also through choosing the right mix of vendors to meet the company's needs. By going with an unbundled plan, an employer can usually get a superior 401(k) - in cost and in service.

The idea of an unbundled plan can be overwhelming at first: all those vendors, all those services. Employers wonder if they're even qualified to make the necessary choices. ("If I choose wrong and pick the wrong investments, for instance, ones that end up not performing as well as those of another provider, will I have failed in my fiduciary responsibility to the plan and be held liable for any loss in investment revenue to my plan's participants?") Of course, there's also the question that if they go with a bundled plan and the provider they choose is very competent in one area but inadequate in others, have they failed in their fiduciary responsibility in that instance, too? Making these decisions is part of offering a 401(k) plan; the considerations involved are really not too different from those in choosing providers for your company's health, dental or other insurance benefits.

As with Chapter 10, we show the Who Does What table (in the skewed form described above) and have the reader complete a worksheet (or pull out the one completed earlier) about the company's needs and expectations for the 401(k) plan. Then we get to the chart comparing unbundled plan providers.

We actually have two charts comparing unbundled plan providers. The first is a traditional breakdown of unbundled plan vendors; the second lists third-party administrators who offer plans that are somewhere in between the typical bundled and bundled plans. (Many third-party administrators, although their name isn't on the investments, will oversee the entire plan and its investment for the plan sponsor; they will do all the legwork of finding the best investments for the plan, and will then provide the sponsoring employer with a narrowed down selection to choose from, along with important ratings and other information to help the employer make educated decisions. Hiring them is just like hiring a typical bundled plan provider in that most of the work is done by the third party administrator - all services arrive at the company through one door. Technically they're providing unbundled plans, but those plans are different in substance and in the amount of work they ask of the plan sponsor, so we've given them their own chart.

As in Chapter 10, there is some text in Chapter 11. Readers are sometimes merely told where in the book to turn for the complete discussion of a topic mentioned in the charts; at other times, a new explanation is warranted. Our suggestions for evaluating potential vendors are summed up in checklists for each type of vendor (investment provider, third-party administrator, etc.) and accompanying worksheets for readers to complete in choosing the plan's providers.

Appendix       (approximate length: 10 pages)

The appendix is a phone book of plan vendors. Entries include a brief description of the type of services offered (such as "all" or "investments only") and contact information for pricing information.

Glossary and Index       (approximate length: 35 pages)

We went with the idea of a combined glossary/index because we find it most useful. Although we've been diligent in trying to keep our text free from jargon, there are terms with very specific definitions that are unavoidable in 401(k) discussions. The glossary entry tells the reader what the term means; if the reader needs additional explanation, that's where the index entry, which comes at the lower right, in bold, of each glossary entry, comes in handy.





401k Administration Made Easy

Outline for reference book proposal

I. Introduction

A. What the problem is and how this book will solve it?
  1. 401(k) retirement savings plans can have tremendous benefits for companies and their employees. On the other hand, 401(k) plans can be a fearful - perhaps too fearful - thing for a company, especially a small or medium-size one, to contemplate.
  2. The fears are almost all based on misconceptions and ignorance; it's really quite simple - if you know what you're doing and have the right information.
  3. This book spells it all out. It gives you, the reader, the knowledge, the tool and the software to plan and run a successful 401(k) plan, whatever your role.
B. Brief explanation of what a 401(k) plan is and why they're so popular
  1. From the employer's point of view
  2. From the employee's point of view
C. Who should read this book
  1. Decision-makers, whether they're thinking about starting a plan or already have one up and running
  2. Plan administrator or anyone else charged with day-to-day duties connected with the plan
  3. Company employees participating in the plan or thinking about it
D. Why you need this book
  1. To administer your company 401(k) plan effectively
  2. To avoid financial liabilities and disaster
  3. To ensure that employees get a plan that's good for them and for the company
  4. To tie onto your back when riding your bicycle at night, so motorists can see you
E. How to use this book
  1. As a learner's manual
  2. As a day-to-day guide in running the plan
  3. As a first-aid kit
F. General introduction into how the book is organized and presented
  1. Overview of the contents of the book
  2. Overview of presentation (icons, used, etc.)

SECTION A: GETTING STARTED

I. Chapter 1: deciding if a 401(k) is right for the company

A. What a 401(k) retirement savings plan is

  1. What, in general, a pension plan is
  2. As a cash or deferred arrangement, but what's that, how does it compare with traditional defined benefit retirement plans, and is this all good for the company?
  3. Comparison of defined contribution plans (largely presented in a chart)
    1. SEP (simplified employee plan)
    2. SARSEP
    3. Simple IRA (an offshoot of the traditional Individual Retirement Account)
    4. Traditional IRA
    5. Simple 401(k) (a fairly new IRS creation)
    6. Traditional 401(k)
B. The advantages and benefits to the company
  1. Encourages loyalty because rewards lasting employment
    1. Encourages current employees to stick around and helps attract employees who will want to stick around
  2. Can be a very cost-effective benefits to provide
    1. Compared to benefits, in general
    2. Compared to other retirement benefits
      -- Stock bonus plan, profit-sharing plan, (pre-ERISA) 403(b)/money purchase plan, rural cooperative plan, traditional defined benefit-type plan,...
    3. If company already has a profit-sharing or stock-bonus type plan it can easily and cost-effectively add a 401(k), which is especially attractive to employees for the reasons given below under item 4
  3. Buyer power due to high competition among 401(k) providers
    1. Getting the options you want at a price you can afford
    2. Funnel money saved into the plan in the form of matching contributions - which make the plan, your company plan (as compared to your rival company's plan), even more attractive and potentially valuable to employees, encouraging even stronger employment loyalty
  4. Employees like 401(k)s
    1. Social security not fail-safe, nor sufficient
    2. Personal savings usually not enough to bridge the gap between social security income and comfortable retirement income
    3. 401(k) participation voluntary, as is level at which to participate
    4. 401(k) salary deferral rate and investment allocations up to the participant's discretion - and both are readily changeable
    5. 401(k) deferral amount automatically deducted before participant receives paycheck, helping the worker save money he or she might otherwise spend
    6. 401(k) participant has control of account at all times
      -- All participant contributions (salary deferrals and rollovers) are always 100% vested
      -- Any matching contributions become increasingly the participant's property with the years of service for employer
      -- If participant leaves company, he or she does not have to sacrifice the 401(k) account's tax-deferred status (IRA rollover, rollover into new employer's plan); a distribution, however, will lift that protection as well as subject the money to early withdrawal penalties
    7. Current (and possibly future) income tax savings
    8. Compounding effect that the tax deferred status of the 401(k)
  5. Many employers find the "total cost of payroll, plus pensions, will be less than payroll costs alone, without pensions" (CCH ¶2325)
  6. If employees know they have enough to retire on, they will be less likely to hang on longer than they are useful (and perhaps even becoming detrimental) to the company, savings the company the hardship of having to fire them
  7. A sound pension plan makes the company look good: "the mark of a high-caliber organization" (CCH ¶2330)
C. The costs (although all tax-deductible as business operating expenses)
  1. Plan provider fees
  2. Trustee fees
  3. Employer contributions, if any
  4. Supplies fees (photocopying, storage, etc.)
  5. Staff labor costs (plan administrator and any assistants)
    1. Actual costs
    2. Time not spent doing other duties cost
D. Versus defined benefit plans
  1. Defined benefit plans have more regulations and so are more cumbersome to deal with, which is a key reason why the 401(k) is increasing in relative popularity
II. Chapter 2: Setting Up a 401(k) Plan: Part IRS, Part Plan Provider, Part Sponsoring Employer

A. What the Internal Revenue Code defines
  1. ERISA: what it is and how it affects 401(k) plan operation
    1. "the cornerstone of employee benefits law"
    2. Minimum standard of fiduciary conduct for 401(k) trustees, administrators, etc.
    3. Civil and criminal laws through which standards set can be enforced (participants usually the complaining party)
    4. Public disclosure of plan administration and financial affairs
    5. "improve the equitable character and soundness of private pension plans" (2010)
      -- Full vesting mandatory for long-time employees (more than six year employees)
      -- Minimum funding standards for plans
      -- Plan's assets have to be insured against risk of plan termination
  2. Plan qualification rule (including contribution requirements/limitations)
    1. Employee
    2. Employer (exclusive plan and minimum funding requirements, among others)
  3. Distributions rules
  4. Vesting rules
  5. Excessive deferral and top-heavy rules and remedies
  6. Minimum coverage rules
  7. Survivor annuity rules
  8. Nondiscrimination rules
  9. Social security plan integration
  10. . Plan merger and transfer rules
B. What the plan provider...
  1. Decides for the plan (the options the Code allows a plan to offer - or not; if yes, the Code, of course, sets the ground rules)
    1. Whether or not it wants to handle loans and/or hardship withdrawals
    2. What and how many investments to make available (there are minimums)
    3. How often to accept new enrollments, changes to enrollments (there are minimums)
    4. Frequency of participant account statements (there are minimums)
    5. Data collection methodology (how & form in which data gets from company to provider)
    6. Fees
  2. Does (its basic responsibilities in the plan's day-to-day operation)
    1. Administrative/recordkeeping duties
    2. Investment provider duties
    3. Information duties (go under both a. and b., above)
C. What it's up to the sponsoring employer...
  1. To decide in defining the plan (the options the Code allows a plan to offer - or not)
    1. Out of available options, decides which to offer and then what the policy will be in offering that option - within the parameters set by the Code and the rules imposed by the plan provider
    2. Often a plan provider will make all options available - for a price - but might dictate the manner in which they are offered; luckily for employers, the market today gives the buyers a lot of power, so 401(k) providers are more pliable
  2. To do (its in-house duties in the plan's day-to-day operation)
    1. The plan administrator's role and duties (in brief; detail in next sections)
    2. The plan agent's role and duties
    3. Plan's interconnection with payroll dept
D. The other players and their duties
  1. Trustee(s) - who can but don't have to be of the sponsoring employer
  2. Registered representative
    1. Does he/she have to be registered with the NASD (or some other supervising body)?
  3. Broker of record (aka broker/dealer)
    1. Does he/she have to be registered with the NASD? If not, are there advantages to having one who is?
  4. Plan participants
E. Legal documentation required
  1. For the government
  2. For the employees
III. Chapter 3: The Company 401(k) Plan: Balancing Needs, Budget and Expectations

A. Plan needs to be seen by employees as a benefit, not as something that lacks the services (such as loan) and flexibility (such as the ability to change investments/contribution amounts fairly often) they need
  1. This factor should be weighed just as heavily (if not more!) than budget, manpower, etc. as a factor guiding you in your decisions regarding your 401(k)
B. Types of 401(k) plans to choose from
  1. Simple
  2. Traditional
C. Discretionary items in a 401(k)
  1. Not the mandates of the Code or the ERISA statutes (see Chapter 2)
  2. Not anything the plan provider mandates or refuses to offer - or refuses to do so at a cost that's within reach (but maybe you should just look for a different, more accommodating plan provider) (see Chapter 2)
  3. What is left to decide
    1. Matching contributions (formula and vesting thereof, if any)
    2. Age and length of service eligibility requirements, if any
    3. Loan policy
    4. Hardship withdrawal policy
    5. Plan investments (from the pool the provider choose to make available from the pool the Code says are allowable) directed investment rules
    6. Who pays for what (i.e., participants pay or company pays)
D. To bundle or not to bundle services
  1. Unbundle: more investment option diversity (which is more likely to meet employees' needs); provider may not be especially adept at recordkeeping
  2. Bundle: the convenience of one provider
  3. So-called "third-generation" 401(k) plans
IV. Chapter 4: What Can Go Wrong with a 401(k) Plan

A. Compliance issues
  1. What they are
  2. Where they come from
  3. How to correct them
  4. Preventive measures
B. ERISE-based complaints: fiduciary responsibility

C. Other participant complaints and/or issues to be settled by arbitration

SECTION B: KEEPING GOING

V. Chapter 5: Operating a 401(k): The Plan Administrator's Job as Link Between Plan and Employees

A. Information source/disseminator of plan-related information (as supplied by the plan's provider)
  1. General 401(k) plan information
    1. What a 401(k) plan is
    2. What restrictions it entails
      -- Contribution limits
      -- Withdrawal limitations
    3. The tax & savings advantages of participation
    4. Participants' rights (ERISA)
    5. General investing info: portfolios, risk-reward profiles, etc.
      -- Mutual fund investing: why it's popular with 401(k) participants
  2. Plan-specific information
    1. Participation eligibility requirements
    2. Matching contributions
      -- Existence
      -- Formula
      -- Vesting
    3. The plan's investments (prospectuses, as supplied by the mutual fund companies)
    4. How periodically elections can be changed
    5. Availability of 401(k) loans, hardship withdrawals
B. Enrollment meeting leader/organizer
  1. Disseminate information
    1. What a 401(k) is
    2. Why join one
    3. Tax implications of participation
    4. What happens if the employee leaves the company
      -- Rollover to IRA
      -- Rollover to another qualified plan
      -- Take the money as a lump-sum distribution - and incur the tax and early withdrawal penalties
    5. Info about the company plan
    6. How to join
    7. Changing your contribution and/or investment elections
  2. Answer employees' questions
C. Loan officer
  1. Evaluator of each loan application (loan criteria) based on applicant's qualifications and the plan's current financial eligibility to grant loans
  2. Explainer of the company's 401(k) loan policy and the tax and other implications thereof (and provider of written material explaining this policy, as required by ERISA)
  3. Loan payment collector
D. Hardship withdrawal officer
  1. Duties parallel loan officer duties
  2. Evaluate and rule upon (as granted or denied) all requests for hardship withdrawals (using the IRS rules as the measuring stick)
  3. Explain (verbally and in writing) the company 401(k)'s hardship withdrawal policy to all plan participants
E. Compliance officer: to notify and, within power limits, correct
  1. Participant excess deferrals
  2. Other participant infractions
  3. Top-heavy, ADP or ACP compliance problems
  4. Break-in-service determinations
F. The In Box: The person to whom all participant requests are first directed (and who should look over those requests for completion, discussing them with the participant as needed before acting on them - or forwarding them to the plan provider, if applicable)
  1. Enrollment materials (new as well as subsequent changes to), including deferral rates, investment allocations, beneficiary designations, and personal address, etc. information
  2. Loan applications, hardship withdrawal applications
  3. Changes in material status (and any related changes to pertinent financial data, such as if spouse also contributes to a retirement plan or account)
  4. Claims for receipt of ) benefit/distribution requests (in cases of death, permanent disability, or retirement)
  5. Terminations of employment: rollover or distribution requests
  6. Requests for "If I retire today, what is my 401(k) worth?", an ERISA right
G. The Out Box: The person through whom all plan-related information and literature comes to the company's employees
  1. General information about 401(k)s and participating in one
  2. Specific information about the company's 401(k) and participating in it
  3. Investment information
    1. General
    2. Plan-specific
  4. Enrollment materials, including notification of open enrollment periods
  5. Summary annual report (mandatory right)
  6. Statement re: retirement benefits eligibility (in response to request, as often as annually)
  7. Specific information about a participant's 401(k) account
    1. Account statements
    2. Notice of over-contributions or other infractions
    3. Denial (in full or in part) of any formal claim for distribution of benefits (must be done so in writing)
  8. Top-heavy or other compliance problem notices of correction (return of contributions in the correction of the compliance problem; see "financial switchboard")
VI. Chapter 6: Operating a 401(k): The Plan Administrator's Job as "Financial Switchboard Operator"

A. All the allocations into and distributions from the company 401(k) plan (and all the paperwork involved) go through the plan administrator
  1. $ into the 401(k)
    1. Normal 401(k) contributions (participant and employer matching)
    2. Rollovers from employees' previous qualified plans
    3. Loan repayments
  2. $ out of the 401(k)
    1. Qualified withdrawals/disbursements due to death, disability or retirement
    2. Loans
    3. Hardship withdrawals
    4. Employment terminations
      -- Lump sum distribution
      -- Rollover to an IRA or another qualified plan
      -- If participant has $3,500 or more in account, can leave it in plan for withdrawal at a later date
    5. Unqualified early withdrawals (do not qualify for hardship withdrawal status)
      -- Participant pays 10% excise tax-plus ordinary income tax (state and federal if contributions into account were exempt from both state and federal income tax) - on any amounts withdrawn without a qualified reason
  3. Interfacing with the plan provider(s) in the above duties
B. Tax Reporter (may or may not get plan provider's help with these)
  1. 5500 for company taxes
  2. 1099s for employees' taxes
VII. Chapter 7: Operating a 401(k): The Plan Administrator's Job as Marketing and Sales Representative

A. General sales and marketing
  1. Working with the plan vendors to make sure forms, literature, etc. for employees is useful (easy to understand, easy to complete, contains pertinent information and replays that information well)
  2. Being accessible
  3. Responding to requests quickly
  4. Deciding on the number of open enrollment periods ideal for the company plan
  5. Saleability of lenient loan provisions
  6. Investments
B. The enrollment meeting
  1. Annual open enrollment meetings, semi-annual if needed
  2. Use of slides and other visual aids
  3. Being the meeting leader; being the lead speak
  4. Plan provider's role
  5. Selling the plan
    1. Explaining mutual fund investing
    2. Explaining the plan
VIII. Chapter 8: Answer to Commonly-Asked Questions

A. From employers (including plan administrators)
  1. General 401(k) questions
  2. Questions regarding sponsoring a 401(k)
    1. Plan provider responsibilities
    2. Sponsoring employer responsibilities
    3. Compliance problems
    4. Changes to IRS regulations (how frequently, how does sponsoring employer find out about them, etc.)
  3. Questions regarding trustees and fiduciary responsibilities
  4. ERISA-related questions
  5. Questions regarding company's duties and responsibilities
B. From employee (for plan administrators to use as a reference)
  1. General questions about participating in a 401(k) plan
  2. plan-specific questions (regarding what can vary from plan to plan)
    1. Some answers have fill-in blanks for plan administrator to fill in the company's policy variables, regarding, for instance, the exact eligibility rules or the company's loan policy)
  3. ERISA-related questions (regarding rights)

SECTION C: CHOOSING YOUR PLAN'S PROVIDERS

IX. Chapter 9: Selecting Your In-House Personnel

A. Trustee(s)
  1. Duties
    1. Fiduciary
    2. Recordkeeping
  2. Deciding on whether or not to have someone from within the company be the trustee
    1. Pros and cons of having trustee(s) be someone from the company
    2. Pros and cons of having trustee(s) be someone from outside the company
B. Plan administrator
  1. Quick overview of all the roles the plan administrator has to fulfill (from Section B)
  2. Qualified in a plan administrator that are likely to facilitate your plan's operation
    1. Foresight: falling behind could be costly to your company
    2. Organized
    3. Good at public relations
X. Chapter 10: Selecting Your Plan Provider(s)

A. Roles to fulfill
  1. Quick review of what the IRS, plan provider and sponsoring employer each decide for your company plan
  2. "Plan provider" umbrella term
    1. Registered representative
    2. Broker of record (broker/dealer)
    3. Investment provider
    4. Plan provider
    5. Record keeper
  3. Whether assessing various traits of a single plan provider (for a bundled plan) or a combination of several (for an unbundled plan), the criteria are much the same
    1. Basic fee structure (base component, eligible employee component; takeover fee, if applicable)
    2. Quality and variety of investment choices (for employer to pick from)
    3. Any limitations on investment choices (and fees, if any, for additional investments)
    4. Limitations, if any, on the minimum number of participants
    5. Account statement preparation for each participant? If so, how often (monthly, quarterly, etc.)
    6. Compliance and top-heavy testing? Cost?
    7. Loan? Cost?
    8. Record keeping
    9. Tax form preparation services? Cost?
B. Service and fee comparison of the top 25 providers
  1. For large plans
  2. For smaller plans
C. Going shopping
  1. Because there're a lot of 401(k) dollars floating around out there and more and more employers adopting the benefit package every day, a lot of competition has arisen among providers - and a lot of new providers have been incensed into the market. New companies are entering the provider market everyday, lured by the 401(k)'s continuing rise in popularity. Their seal for capturing at least a good piece of the market for 401(k) services grants buyers (401(k) sponsoring companies' power).
XI. Chapter 11: The unbundled 401(k): What to shop for

A. Roles to fulfill
  1. (see Chapter 10 list)
B. Service and fee comparison of the top 25 providers
  1. For large plans
  2. For smaller plans
C. Software-based plan providers: the new kid on the block
  1. Reliability
  2. Cost-effectiveness
  3. Easy of use
  4. Sample




FIRST CHAPTER

401k ADMINISTRATION MADE EASY

INTRODUCTION

IRS regulations! Top-heavy determinations! Beneficiary designations! Yikes! It's 401(k) administration attacking from every side! You've got the IRS and those ERISA stipulations hounding you. Look out: here comes your plan provider (who's hardly the beacon of care and guidance you'd hoped for). Your trustees' recommendations are confusing, the plan's investments lack depth and reliability, and, oh no - it's a swarm of employee-participants, each brimming with special needs and situations! It's too much to handle (and too much paperwork to keep track of!). Who in the world would ever want to tackle such a beast!

But of course running a 401(k) plan can't be that bad. 401(k) s are very popular - among employers as well as their employees. These people must know something. The plan administrators must have gone to school for this or something. (Maybe they read an advanced, advanced copy of this book!)

This introduction will give you an idea of how 401(k) Administration Easy can simplify and make more efficient your entire 401(k) experience. We'll look at:

  • Why the book was written "for dummies,"
  • What a 401(k) retirement savings plan is, anyway,
  • Why an employer would want to offer a 401(k) plan to the company's employees,
  • Who should read this book,
  • Why you need this book,
  • How to use this book,
  • What this book covers (and to what end),
  • What this book is good for,
  • The icons we use in this book to help guide you along, and
  • Where to start.
So just turn the page and let's get started!

WHY A BOOK FOR SMALL BUSINESS OWNERS?

Your employees want a 401(k) plan. 401(k)s are much more suitable to today's mobile workforce1 than are traditional defined benefit and profit sharing plans, which are barbed with vesting schedules and other participation stipulations that penalize the non-lifetime employee. Your competition offers its employees a 401k(k) plan. But you're worried: worried about costs, about mistakes, about, well, all those things you've sure are out there for you to be worried about. You don't know anything about 401(k) plans - and you don't have the time to learn (nor the money to hire someone already well-versed). Maybe you could just offer a really cryptic 401(k), one with very options and little opportunity for participants to vary their investing behavior. Surely that would make administration pretty simple.

But is so limiting your 401(k) plan a good idea - and will it really simplify administrative duties? Your main purpose in sponsoring a 401(k) plan is to earn goodwill and loyalty from your employees by offering them a good retirement benefit. Will they value an inflexible plan unsuited to their individual needs?

Instead, maybe you (and your plan administrator and any assistants to that administrator) just need a little education and guidance. Well, you've come to the right place. 401(k) Administration Easy will help you define and fulfill your 401(k) roles effectively (and make sure the plan providers and trustees do the same!) - Without your having to spend years or even months in training. The good thing about 401(k) regulations is that they force certain regularities among plans. We cover all those, as well as the things that can vary, and let you benefit from our years of experience in working with 401(k) plans and their operation, of seeing what works and what works best. That's how we've able to spell out everything you need to know to run your 401(k) plan in a way likely to produce a valuable and rewarding benefit for your employees - and in our explanations, we never assume you have tax or legal expertise. The novice can run a 401(k) plan.

And you don't need to memorize the book, either. Just look ahead, toward the end of this introductory section, under the heading How to Use This Book to see how simple life with a 401(k) can be.

WHAT IS A 401(K) PLAN ANYWAY?

  • "401(k)" is a section of the Internal Revenue Code. It and its referenced sections set the rules for a type of defined contribution retirement plan that has income tax concessions for its participants.
  • In a 401(k) plan, workers have their employer place a portion of their pay in qualified investments of their choosing (chosen from among those the employer has make available in the plan, which were chosen from among those the plan provider has made available, which were chosen from among those the Internal Revenue Code has said are allowable) rather than having the money paid to them in their paychecks.
  • Employers can contribute, too, within limits, to their workers' 401(k) accounts. (This goes over very well with employees.)
  • Neither 401(k) contributions nor their investment returns are subject to income taxation (in all cases federal, in most cases state) until withdrawn from the plan.
  • Removing money from a 401(k) plan before retirement (at age 59 ½ or later), death or permanent disability generally subjects the account holder to IRS penalties; participants changing jobs are given options to protect the tax-deferred status of any 401(k) monies accumulated.
Most people agree that Social Security really won't provide them with a comfortable retirement income - and that the meager future it does afford is shaky, at best, given the demands our increasingly elderly population will place on the system. Even so, not a lot of people set aside enough money during their working years to reasonably support them in their retirement: a 1996 survey of full-time workers found that 71 percent felt they were not setting aside enough money for their retirement (that's an increase of 11 percent from just four years earlier). Seventy-one percent! This despite the fact that workers are saving 10, 20, even 30 percent or more than they were just a few years earlier. The problem is that, although savings rates are increasing, they have not increased to a rate sufficient to support workers in their retirement. The average 30-year-old needs to save an additional $662 per month, every month, until retirement at age 65 to yield an annual retirement income of roughly $26,000.

So what do people do? Sell all their major assets to retire? Perhaps rely on the generosity of any defined benefit plan (there's a glossary at the back of the book) their former employer may have set up (and if the worker had many employers during his working life, as is increasingly the case among today's workers, were enough years spent with any one employer to earn these benefits?). Maybe they turn to government assistance.

The uncertainly of this scenario (and the potential for massive government dependency) spurred federal lawmakers into changing the Internal Revenue Code to try to promote long-term savings. This time, they gave tax breaks on defined contribution plan monies (like we said, there's a glossary at the back of the book). The rules, which went into effect January 1, 1978, come primarily under Internal Revenue Code section 401(k), hence the name "401(k) retirement savings plan" for the plans ruled under the statute and its related clauses.

WHY WOULD AN EMPLOYER WANT A 401(K) FOR THE COMPANY?

  • It's a benefit that rewards lasting employment with the company.
  • 401(k) plans are proven to be very popular with employees: the benefits of participation are undeniable and unequalled elsewhere in the employment benefits marketplace.
  • Relative to other employee benefits, 401(k) s are low-cost for an employer to offer. (The plan can even be set up so that participants absorb most of the costs without making that burden large enough to deter people from participation!)
  • The competitive nature of today's 401(k) plan provider market means an employer has substantial leverage with plan providers when it comes to costs and service - probably more power than most people think!
The truth is, running a 401(k) plan really isn't as monstrous (or is that monstrous?) as it might at first seem. It's a great perk for employees: nationwide, nearly 80 percent of workers eligible to join their company's 401(k) plan do3 (just remember the savings' shortfalls mentioned in the previous section to understand why workers would like an easy, convenient way to save money - especially if that money can be set aside before they even see it and have the temptation to spend it). Sponsoring a 401(k) plan for the company is sound business, too, given that the costs are tax-deductible as business expenses and that company prestige and worker loyalty increase. If it weren't good business, well over 400,000 companies in the U.S. wouldn't be sponsoring a 401(k) plan - and the figure wouldn't be increasingly rapidly4, especially among small and medium-sized companies.

WHO SHOULD READ THIS BOOK?

  • Any company leader or decision maker with the power to decide on or control a company's benefits package
  • Any person who has been designated plan administrator for a company plan - especially if that person has little or no working knowledge about 401(k) administration
  • Anyone who has been burned by a less-than-optimal 401(k) plan in the past, whether the problems stemmed from an incompetent plan administrator or trustees, or ineffectual and unresponsive investment and service providers
  • Anyone interested in (or saddled with the responsibility of ) establishing a 401(k) plan for a company
  • Anyone interested in (or saddled with the responsibilities of) helping run a company's 401(k) plan
  • Anyone interested in evaluating the quality of the company 401(k) plan or its providers and their services
Any company employee curious about knowing what goes on behind what he or she sees as a plan participant (but might we suggest that maybe you need a hobby?)

Wow, that's a lot of people. But there can be a lot of people involved in the interworking of a single 401(k) plan, which is why it's a good idea to know going in (or at least while you're still in there) what the "rules of the game" are. (There are ways to simplify this structure without sacrificing a plan's quality - maybe even enhancing it!)

The company plan administrator plays a critical role in achieving an optimal company 401(k) retirement savings plan. Unfortunately, he or she may not be highly schooled in fulfilling that role. The plan administrator is the nerve center for the plan, the one through who all documents, all requests, all information must pass. He or she serves as the on-side expert, the one employees go to for literature about the plan and its offerings, the one employees go to when they need help, the judge, jury and expert witness in matters of 401(k) loans and hardship withdrawals, the enrollment specialist, the compliance officer, the financial switchboard operator, the year-end tax reporter, and the one who must make sure the outside service providers (the investment provider, the administrative and recordkeeping services providers, even the trustees) are all holding up their ends of the plan and serving the employees well. (Wow! Is there even such a super staffer on the payroll?!)

It is a big job - but, really, it's not impossible, nor is it even an improbable accomplishment. A plan administrator's multifaceted job can be greatly simplified with some education, planning and forethought. That's why we wrote this book. Many of the demands on a plan's administrator are predictable and cyclical: staying ahead of (or at least well prepared for) them can make all the difference.

WHY YOU NEED THIS BOOK

  • To effectively administer your company 401(k)
  • To save you (and your company plan) from unnecessary headaches and possible financial liabilities and disaster (ERISA laws can be very stringently enforced!) (ERISA is in that glossary at the back of the book that we've mentioned.)
  • To make sure your employees look on the company 401(k) as a quality plan, not a joke
  • To tie onto your back when riding your bicycle at night so motorists can see you
The popularity of 401(k) plans (and all the money being invested in them) has inspired more and more regulation to inhibit abuses by plan sponsors, fiduciaries and plan advisors. We've composed this book to help guide the non-401(k)-expert to safe passage in their quest to offer one of the most popular employee benefits available today.

It's hardly a perfect world, so there's a fair change that you lack enough knowledge about 401(k) s and their administration to run one safely and effectively. Even if the plan providers you've hired for your plan are very attentive and helpful, it's a little scary to rely solely on their direction. Plus, for your plan administrator and benefits package decision maker to recognize their good fortune in plan providers they need to know what they've looking at!

It's undeniable that people within the company will have to make critical decisions regarding the company plan and its operation. And there's that sticky "fiduciary responsibility" thing floating around out there (uh oh - there's the scary) phrase you've probably heard of and been told to guard against). Fiduciary responsibility for a 401(k) is often the precept for blame that courts use in ruling on any legal action brought regarding a 401(k) plan, and should therefore be taken very seriously. You have to at least know when your actions open you up to the likelihood of being a fiduciary for your plan.

So whether you are the company benefits' package decision-maker or the person responsible for the day-to-day implementation of that package, 401(k) Administration Easy will help you make educated decisions that can save you from many a future headache. Although it contains important information about setting up a 401(k) and choosing providers to service it, the book concentrates on the role and duties that the in-house person, the plan administrator, needs to fulfill for their plan to run smoothly and serve the employees well. (The goal of offering the plan, after all, is as a perk for employees; if they don't like it, all the effort and expense will be wasted.)

HOW TO USE THIS BOOK

  • As a first-aid kit
  • As a before-you-get-behind-the-wheel learner's manual
  • As a day-to-day guide in running a 401(k) plan
It would be dangerous (to yourself and to others) to get behind the wheel of a car and drive down the interstate with no knowledge of how to make the car turn, stop or otherwise maneuver, nor with any knowledge of the rules of the road. Luckily, learning basic driving skills are not that hard; most people can get up and running pretty quickly. Running a 401(k) plan isn't altogether different.

Hopefully before you build or get behind the helm of a 401(k) plan you have a little knowledge about where you're going and how you're going to get there. But even if you're already up and running it's not too late to make sure your course is the right one and that you have enough knowledge to make it happen.

To avoid problems before they ever get brewing, you should first skim through the first two chapters of 401(k) Administration Easy. These chapters are about setting up a 401(k) and choosing the providers to service it. They'll help you clarify exactly who does what. (The main level of variation between plans will come in who does the tasks that the plan provider can either perform itself or have the plan administrator perform.) It's then a good idea to quickly go over things with your plan provider, trustees, etc., to make sure everyone has the same conception of who's responsible for what.

One you know your exact role (whether that be of plan administrator, company executive, or other), you can skim the book for sections relevant to it. We've make this easy by putting checklists of topics discussed at the start of each chapter. You can also use the checklists and guides as well as the glossary/index to find the remedy for whatever wrong with your plan.

WHAT THIS BOOK COVERS (AND TO WHAT END)

  • Every task likely to fall under the realm of the plan administrator - and not only the how-to-do-its but also the why-you-betters (those ERISA rules can be enforced pretty severely yet interpreted rather broadly)
  • Formulating or updating a 401(k) into the perfect plan for the company and its employees
  • Choosing the most suitable service providers, trustees, etc. for the company 401(k) and the needs of its participants
the author of this book, James Gilbert, has spent many years in the 401(k) business helping clients map out and streamline their 401(k)s into plans that are easy to administer yet enormously flexible and rich in investments; participants get a top-of-the-line 401(k) without the employer's having to sell the farm to pay for it. Jim has been especially adept at helping small and medium-sized companies gain the retirement plan advantages previously almost the exclusive territory of large companies (companies with more a few thousand employees). He's the one behind the sample 401(k) administration software the publishers have enclosed with this book.

Throughout 401(k) Administration Easy Jim shares his years of experience to help you get the most out of your 401(k). For instance, we've noted which administrative tasks are similar and can be consolidated, which 401(k) options have the highest "this could get you in trouble" quotient.

So whether your company has its 401(k) plan in place but would like to improve its operation or it's just starting to think about offering a retirement saving plan to its employees, here's a host of information in an easy-to-use, easy-to-digest format. We've tried to make the reading as painless as possible (unless, of course, you've severely allergic to bad puns) yet very accurate in its content so that it will be a true asset to you and your company.

WHAT THIS BOOK IS GOOD FOR

  • Helping your company decide on and set up a quality 401(k) that will be well-suited to your company and highly valued by your employees
  • Helping you administer that 401(k) plan on a day-to-day basis in a vary that will minimize the likelihood of compliance, fiduciary or other problems
  • Helping you administer that same 401(k) plan with ease and efficiency
  • Helping you get the most out of your plan provider(s) - even if that means switching providers
  • Helping you keep your door propped open
  • Helping you tell your cat where to sleep: just open the book up and show some interest in looking at it and your cat will insist that's the lounging locale, possibly the bathing pad, too

ICONS WE USE

This is our angry 401(k). It rears its ugly head when you've done something against (or neglected to do something regarding) how a 401(k) plan is designed to run, and problems are likely now at your doorstep - possibly already in your lap.

There are other ways to do things than the ones we spell out. When discretion is permitted (either with how to do something or whether to do it at all), we mark our recommendation with this icon.

Unfortunately, legal responsibilities for a 401(k) plan (especially the infamous "fiduciary responsibility") are not always perfectly definable. We do the best we can, but the truth is there isn't always a definitive answer. This icon warns you to be extra careful and meticulous; it often appears in conjunction with that recommending you consult your legal and/ or tax advisor on the matter.

There are times when should consult with a professional tax or legal advisor (or instruct your plan participant to do so). Advisors need to earn a living, too, after all!

This is a disgruntled employee. You want to avoid him/her whenever possible - and not by ducking in the nearest closet, but by planning and administering your 401(k) well. You want to produce a plan that's beneficial to your employees and popular among them. This guy looms around a lot of the discussions to remind you not to forget this ever-important factor (and potential hazard) in your decision-making processes!

Internal Revenue Code psychology - and, no, this is not intended to be an oxymoron. There is reasoning behind why and with what end in mind 401(k) regulations have been written. Sometimes knowing them can help you out of a questionable situation - or help you avoid them altogether.

This is our happy 401(k). It is running well; all problems have been corrected. He's a good guy to have around, the guy you want to see.

WHERE TO START

As we said under How to Use This Book, you can take a first-aid-manual approach to your 401(k), treating problems, as they arise. But you'll save yourself a lot of heartache by using the book in a more proactive manner: A little foreknowledge will keep many problems from ever arising.

We've organized the material into three main sections: Getting Started, Keeping Going and an appendix on Choosing Your Plan Provider(s). There's also a glossary that contains an index to help you quickly address immediate difficulties.

Start with a skim of the book. We've designed it so you can do a precursory skim in an hour or less: There's a checklist of topics discussed at the start of each chapter; reading the checklists then flipping through and looking even just at the chapter's graphics should give you some information to work with - and some idea of where you need help. Help, of course, is close at hand - probably as close as the page you'll be looking at!

James Gilbert

James Gilbert changed the nature of 401(k) plans back in 1986 with his 401(k) Solution. While a stock broker for Merrill Lynch, he had noticed that huge sections of the population weren't exploiting the tremendous income tax and savings advantage that participation in a 401(k) plan offers - and not because IRS regulations were prohibitive, but because the companies providing the plans were not creative enough in their administrative set-up to see a profit from servicing small and medium-sized employers; consequently, the employers could not offer the benefit to their employees. James Gilbert changed all that.

He looked at what the Internal Revenue Code demanded - exactly - and at what duties each of the other parties involved in a 401(k) operation (from sponsoring employer to individual participant) needed to perform and what their needs were in fulfilling these duties. Then he began cutting: Why, for instance, did the plan trustee, plan provider and the investment provider all need to compile duplicate records? Surely one record-keeper (and perhaps one control) was sufficient; the others could work with that one's data when needed. James streamlined the 401(k) from top to bottom (making it more flexible, easier to administer and open to a wider number and variety of investments in the process), and he made the complete 401(k) package available at a cost far below that which any provider before him had thought possible (or practical). He founded a company, Pension Systems Corporation (PSC), devoted to providing affordable, flexible, high-quality 401(k) plans to companies of all sizes.

PSC is currently making the 401(k) even more accessible and easy to use with its 401(k) Easy software and 401(k) Easy Online. The products are sort of like income tax preparation software: it comes with the IRS regulations written right in, and it leads the user through the task at hand, in this case the day-to-day operation of a 401(k) plan. Another James Gilbert brainstorm. In seems this NASD broker/dealer is revolutionizing the 401(k) industry - again.


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