Plan Provisions that I’m Not a Big Fan of

I have written articles about retirement plan provisions that are good ideas and some that are bad.

Here are some provisions that dumbfound me:

  1. Off calendar year 401(k) plans: While I understand companies can have non-calendar fiscal years, I have never been a big fan of off calendar year 401(k) plans where the plan year will not end on December 31st. Why? 401(k) plans are funded mostly by participant salary deferrals and participants must have a December 31st fiscal year for their individual taxes, so the salary deferral limits for a participant (also known as Section 402(g) limit) is on a calendar year, which will never be calculated to determine whether a participant exceeds that limit since their compensation is calculated on the off calendar plan year. Makes sense? For 401(k) plans, it just doesn’t.
  2. 401(k) Plans that don’t offer an in-service distribution at normal retirement age: I believe 401(k) plans should allow an in-service distribution at age 59 ½ and if not, at least offer it at normal retirement age. Heck, it’s mostly salary deferrals and a participant should be able to tap that money when they hit 65.
  3. Defined benefit plans where the only investment is life insurance: Defined benefit plans, solely developed to pay premiums on a life insurance policy within a plan never ends in a happy story in tough economic times, where the employer (usually with only owner-employees) can no longer afford the minimum contributions to the plan, which is the annual premium for life insurance. I have seen too many employers surrender policies at huge losses to them.
  4. 401(k) plans with no Roth provisions: Aside from the tax aspect of it, there is no difference between pre-tax deferrals and a Roth deferrals, so aside from advising the payroll company, there is no reason why a 401(k) plan shouldn’t offer their participants the right to make pre or post tax deferrals.

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