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401(k) today: designing, maintaining & maximizing your by Stephen J Butler

By Stephen J Butler

The writer, cofounder of a third-party pension management enterprise and public speaker, discusses how 401(k) plans paintings, the way to investigate the standard of a plan, and the way to revamp it to be higher. Of most probably curiosity to corporation decision-makers and energetic 401(k) plan individuals.

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Extra info for 401(k) today: designing, maintaining & maximizing your company's plan

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Loan Repayment Loans are typically repaid through an automatic deduction from the participant's salary, so that if the participant is working, the loan is automatically kept current. Page 19 If a loan goes into default while the participant is working for the company, very serious plan qualification problems result. Technically, a loan in default is an unauthorized withdrawal from the plan, so avoiding defaults is imperative. Insisting that all loans be repaid by automatic payroll deduction is the best insurance against this problem.

Not so! Participants taking a hardship distribution will pay taxes at their highest marginal tax rate, because this distribution will be over and above what they already earn. For most participants, the combined federal and state income tax rate will be about 34% at the margin. Then, there will be a federal penalty of 10% and typically a state penalty of about 2%. The combined cost of a hardship distribution approaches 50% for most participants. There is an additional cost. A participant who takes a hardship distribution must wait a year before making any further contributions to the plan.

Plans Offer Professionally Managed Investment Choices Most participants wind up with better investment performance in their 401(k) plans than they would experience otherwise; there are several reasons for this. First, the amount of money in the 401(k) plan is often substantial, enough so that the best investment advisors can be hired; advisors who are more skilled than the smaller-scale financial planners who work with individual employees. Page 13 Second, most successful business owners and senior managers, who are the trustees selecting the investments, are reasonably sophisticated.

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