Plan provisions that every 401(k) plan should have

I probably have drafted and amended thousand of plan over the years and every plan has its own little quirks. When it comes to plan design, I have always believed that some of the bundled providers have it wrong. There is no cookie cutter approach to retirement plan design; so many plans being handled by bundled providers are underserved because the plan document doesn’t fit what the plan sponsors needs or wants to do. You’ll have prototype, fill-in the blank documents that doesn’t have all the choices that a plan sponsor may want or need. For years, I actually was recommended by one of the largest providers to draft amendments to their prototype documents because up until the EGTRRA restatement documents, they had no provisions for new comparability profit sharing allocation.

That being said, even with prototype and non-prototype, I am often amazed on what provisions that plan sponsors don’t have. I am not talking about required contributions like safe harbor, I’m talking about provisions that are common sense and help facilitate administration. I’m talking about 401(k) plan provisions that plan sponsors eventually end up needing one day that they end up spending money to amend the plan to add these provisions. Here are some plan provisions; I like to see in every plan document:

  1. Allowing plan participants to rollover money into the plan and allow them to withdraw it at any time.
  2. In-service distribution, allowing plan participants to access their money at age 59 1/2 , even if they are still working.
  3. Loans, not a big fan of them, but participants may need it for one reason or another.
  4. Hardship provision, same view as #3.
  5. Discretionary profit sharing and matching contribution provisions. Even if a plan sponsor never wants to make one, I feel having those provisions in there are better than not and having a plan sponsor wanting to add them because with the language needed for an amendment, you’ll actually need a new document.
  6. Roth 40(k) provision. I see no reason in not offering it.

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4 Responses to Plan provisions that every 401(k) plan should have

  1. Karen Roberts says:

    I agree wholeheartedly! We also make sure our prototype documents have the same provisions, unless the client specifically tells us not to after being told why they should be included.

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  3. We also encourage our clients to include in their written distribution policy a waiting period post termination of service. This will overcome the option of quitting to get the money.

  4. tom holstein says:

    I pretty much agree also except I, unlike you, prefer loans to withdrawals, even loans subject to hardship restrictions. It substantiates the plan as a retirement vehicle with access and not a “christmas club”. Even under hardship circumstances, the borrowed money has to be repaid.

    Also I weigh the addition of Roth deferrals upon the popuplation. I’d be more inclined to add the Roth deferrals as the average wage of the population increases.

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