By Andy Ives, CFP®, AIF®
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Spring break. Warm breezes and ocean waves and fancy cocktails are top of mind. The aroma of coconut suntan lotion entwined with barbecue smoke floats on salty air. And when morning light flickers through the palm fronds, like Jimmy Buffett said, “I sure could use a Bloody Mary, so I stumbled over to Louie’s Backyard.”
Ordering a Bloody Mary is a bit of a gamble. The foundational ingredients of tomato juice, vodka and spices are standard – but each recipe is a little different. And just how many frills will be loaded atop this concoction? Will it arrive with a lonely olive skewered with a single lime wedge? Or will it be gloriously garnished with chicken wings and crab legs and pickles and a grilled cheese sandwich, all billowing from an Old-Bay-rimmed glass?
401(k) plans are similar. There are plans with basic designs, and there are plans with shrimp and lobster tail skewers (figuratively). Will participants be satisfied with a 10 oz. plastic cup, or is it better to offer a 401(k) pint glass buried deep in extravagant extras…and risk the possibility that employees will be overwhelmed? Plan sponsors must determine their corporate goals, what design options to include, and what best meets the needs of all parties involved.
For example, a 401(k) is not required to include a Roth component. Plans can allow for pre-tax salary deferrals only. If your plan does not offer Roth, then an in-plan Roth conversion is impossible. The plan could be amended to add a Roth feature, but the plan sponsor would have to be on board. If no Roth option exists within a particular 401(k), the only way for a participant to leverage such tax-free benefits is to roll their plan dollars to a Roth IRA.
However, a 401(k) can be designed to limit access. In-service distributions could be forbidden. I once saw a plan that restricted participants from accessing their dollars until they were age 65, disabled, or dead. The business owner was so concerned about an employee quitting and using plan dollars to start a competing business, he designed a 401(k) “savings prison”…which was his right as sponsor. (As we say, “the law of the plan is the law of the land.”)
401(k) plans can allow for loans, or not. They can allow for after-tax (non-Roth) contributions, or not. A profit-share feature can be included…or not. Eligibility restrictions can be added (to a point), and certain types of employees can be either included or excluded from participating.
A plan can offer a matching component, or not. A “brokerage window” could be included as a design feature to allow participants to invest in nearly whatever the market offers, or a limited list of approved mutual funds could be the only investment options. SECURE 2.0 establishes yet another possible design choice – available in 2024, “pension linked emergency savings accounts” are created as way to separate an employee’s long-term retirement dollars from short-term emergency needs. But again – this is an optional plan feature.
How fancy is your 401(k)? Is it an over-the-top, loaded Bloody Mary, or is it a modest beverage with a limp celery stalk? Can participants take a sip, or is it utterly unwieldy? With both plans and cocktails, there is a happy medium. If the fundamental elements exist, a few well-considered and elaborate extras go a long way in satisfying the consumer. Choose wisely…and Cheers!