Most of the employees weren't thrilled to have the cash bonus replaced by a plan that tied up their money for retirement. I didn't want to have this happen again so I pondered how to satisfy the president without getting most of the other employees ticked off. It was in fact a bit of desperation that got the creative juices flowing. I realized Section k that would become effective as of January 1, provided some hope.
I could use this section to design a plan allowing each employee to put into the plan whatever portion of the cash bonus he or she wanted. The only catch was that I had to get the lower-paid two thirds to put enough money into the plan to allow the top one third to contribute as much as they wanted. Employees who put money into the plan would get a tax break but I knew this wouldn't be enough to get many of the lower-paid employees to put money into the plan. This is when I thought of adding a matching employer contribution as an additional incentive.
I was reasonably confident I could get favorable results through the combined incentive of a tax break plus an employer matching contribution. It was at this point when the potential of what I had just "created" hit. Most large employers had savings plans at the time where employees put money in after-tax and received a matching employer contribution.
The Johnson Companies has such a plan. I immediately realized it would be possible to change all these plans so that employees would be able to put their money in pre-tax rather than after-tax. The bank actually rejected the idea because their attorney didn't want them doing something that had never been done before. As a result, the first plan we did was for our employees at The Johnson Companies.
This is what started the k savings plan revolution. It went from all fees being paid by the employer to everything getting bundled and dumped on employees.
Every weekday evening we highlight the consequential market news of the day and explain what's likely to matter tomorrow. You also have a problem with plan complexity, including too many investment options.
How much is the right amount? And then you went to four, five, six [options], and so on. The primary reason this happened over the years is that employers got pressured [by employees who wanted to add specific mutual funds] into including more and more funds. Participant costs increased from roughly 0. More complexity also opens doors for employees to make poor choices. Could target-date funds be the answer to what ails most plans? Had that type of structure been available back at the beginning when this whole thing started, that would have been the way to go.
Rather than attempting to create huge portfolios that have the kind of diversity recommended, and expecting participants to apply that on their own, these take the decision out of it.
I would start by requiring that all employers who have a certain number of employees, whether that be five, 10, or whatever, to offer some form of payroll-deduction retirement program.
Another significant issue is what is referred to as leakage—that too much money escapes the system when people change jobs. So, I would eliminate withdrawals when those events happen. The money has to stay either in a k or an IRA until retirement. I would also eliminate lump-sum options when people retire. Email: editors barrons. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. Enter the k. Why is it called a k?
Despite their popularity today, k plans were created almost by accident. It started when Congress passed the Revenue Act of , which included a provision that was added to the Internal Revenue Code — Section k — that allowed employees to avoid being taxed on deferred compensation.
In , benefits consultant Ted Benna referred to Section k while researching ways to design more tax-friendly retirement programs for a client.
He came up with the idea to allow employees to save pre-tax money into a retirement plan while receiving an employer match. Within two years, nearly half of all big companies were offering k s or were considering it , according to the Employee Benefits Research Institute. If your employer offers a k and you meet the eligibility requirements, you can enroll in the plan and begin making contributions via payroll.
Although at their heart they aim to achieve the same purpose — to encourage Americans to save more for retirement by offering tax incentives — they do this in drastically different ways. Here are the main ways they differ. Have more questions? Click Here to get connected with one of our financial advisors. Traditional k : Your contributions are made before taxes and over the years your money grows tax-deferred. At that point, the money will be taxed as ordinary income.
0コメント