other default will assume that task.
If, however, a participant is comfortable making the choice, the core investment funds are available for do-it-yourselfers who wish to design their own
diversified investment portfolio based on
their risk profile. Then, plan sponsors can
point to all of the resources available to
help people select the appropriate target-date fund or create their own investment
portfolio. “These might include online
education, in-person meetings, fund fact-sheets, guidance tools, advice or managed
accounts,” Lucas says.
Q: Can I get my money out if I have
A: “Plan sponsors want to assure people
that they can access their money if they
need to. But, on the other hand, they don’t
want to position the plan as an ATM to
be accessed regularly for nonemergency
reasons,” Lucas notes.
She recommends clarifying the
difference between the options that may
be available such as hardship withdrawals
and loans. For example, she says, plan
sponsors could say, ‘Your plan allows you
to access your money in the event of an
emergency—even if you are younger than
the age 59 1/2 withdrawal requirement—
via loans or hardship withdrawals. You
may borrow up to 50% of your balance, to
a maximum of $50,000, via a plan loan.
Hardship withdrawals are also available,
so you can access your savings if you have
a[n emergency] such as the potential loss
of your home. Hardship withdrawals are
subject to taxes and a 10% penalty; loans
are not—provided they are repaid. In addi-
tion, interest paid on your 401(k) loan goes
into your 401(k) account.’
Plan sponsors should underscore for
participants that the defined contribution
plan’s true role is as a critical source of
retirement saving, and it generally should
be viewed as an emergency fund only as a
last resort, Lucas says.
Q: If my plan doesn’t allow loans,
why can’t I still get my money?
A: In this instance also, plan sponsors
should explain that the point of a defined
contribution plan is to save for retire-
ment, Ashton says. Plan sponsors should
note that the law says participants may
withdraw retirement savings only under
limited circumstances, including a death,
disability, termination of employment,
retirement and, as discussed above, if the
plan permits loans or hardship distribu-
tions. Further, if the plan allows this,
they may withdraw their money when
they reach age 59 1/2, even without expe-
riencing any of the other “distributable
Q: What happens to my 401(k)
investment if my company goes
out of business?
A: According to Lucas, it may be enough
just to assure employees that defined
contribution plan contributions and
earnings are kept in an individual trust
account—apart from their employer’s
assets—which belongs to the plan participants regardless of their employer’s fate.
Plan sponsors also may want to explain
that, if their company should go out of
business, the plan’s administrator—
which is typically a third party—would be
responsible for maintaining the plan.
Q: May I roll my previous retirement account or an individual
retirement account (IRA) into this
A: Here, plan sponsors would let participants know whether their defined contribution plan allows for rollovers to be made
into the plan, Ashton says.
Q: Why can’t I choose other investment funds? Why can’t we have a
A: “It is important to explain that the plan’s
sponsor is responsible for selecting and
monitoring the investments available in
the plan—with the best interest of participants in mind,” Lucas says. Note that the
fund lineup has been created to provide
participants with the ability to design a
well-diversified investment portfolio that is
appropriate to their risk profile.
As for the second question, while a
brokerage window can provide access to a
broad array of mutual funds or even individual securities, plan sponsors may point
out that there are also drawbacks, Lucas
says. “For example, a brokerage window
may subject participants to additional
costs; brokerage windows can be challenging for participants to use; the investments in the brokerage window generally
do not have the same oversight by the plan
sponsor as the investments in the ‘core’
fund lineup; and few people ever actually
use a brokerage window,” she says.
Q: What happens to my plan
loan(s) if I leave or get let go?
A: The answer depends on how the plan
sponsor has decided to treat loans; some
plan sponsors have started allowing
terminated participants to pay loans back
to the plan after termination.
If this option is unavailable, Ashton
says, plan sponsors should explain that
the loan will be due in full if the participant’s employment terminates. That
means he either has to pay it off or the
unpaid balance will be added to his taxable
income for the year.
Q: What is a vesting schedule?
What does “vesting” mean?
A: Lucas says the best way to start is with
a definition: “Vesting is your right of
ownership to the money in your account.”
Next, describe how it works: “The money
that you save from your paycheck is
always fully vested, meaning it belongs
to you even if you leave the company.” If
employer contributions are not immediately vested, plan sponsors can explain
that there is a schedule of how much an
employee “owns” of the employer contributions to his account with the completion of each year.
According to Lucas, plan sponsors can
point participants to the plan’s SPD to view
the vesting schedule, and plan sponsors
should note that if a participant leaves the
company before its contributions have been
fully vested, the amount not vested will be
returned to the plan. —Rebecca Moore