Understanding asset based charges

A friend of mine has started a 401k program for her employees recently and she says she is paying a number of fees pertaining to it. Among these, she mentions something called the asset based charges. What are these and is there any way I can avoid these charges when I set up my 401k account?- Gina Williams, Fort Lauderdale- starting up a pet care service and veterinary service.

Gina, many 401k plan providers do charge different types of fees when they set and manage your plan. Some of them are quite transparent and upfront about these and they let you know exactly what fees they charge and why. There are others who may be advertising no fee or low fees yet charging these and many other fees, and you end up paying them without even knowing that you are doing so. A good way to avoid hidden fees like these is to opt for a small business 401k plan provider like https://www.401keasy.com/, where the focus is on client needs and client satisfaction. Another advantage of going with https://www.401keasy.com/ is their easily customizable plans, their excellent support and comprehensive mutual funds offerings. Now, let’s give you a quick understanding of what these asset based charges are.

Asset based fees are charged against all of the assets you have in your 401k. They come out of the employee account balance. Usually, they are charged as a specific percentage  of the account balance, debited annually. For instance, your 401k provider may charge your 1% as asset based charges meaning that $1 out of every $100 in account balance goes to him in the form of this fee. Clearly, you can see that the provider is making money when your asset based charges are high.

So what are these fees typically used for? Well, you may think that any fee charged by your 401k provider goes toward money management. But with asset based charges, this is not all that this money is used for. They may also be paying for financial advisors, third party administrators record maintenance, investment management and more. A mutual fund that is charging asset based fees may keep a part of the money collected for its money management, forward a part to financial advisors, earmark another part for other parties to be paid through the record keeper and so on.

The best thing for you to do is check thoroughly to ensure that your 401k provider specifically guarantees ‘no asset based’ charge, if you are keen to avoid these costs.

Getting the most out of your plan

Hi, I’m Richard and I run a small IT services company. I have a small group of employees working for me and recently, I decided to set-up 401(K) accounts for them. While inquiring about 401(K) plans for this purpose, I came across something known as a Safe Harbor 401(K) plan. What kind of plan is this? Could you please care to explain?”

Hi Richard,

It’s great to hear from you and like we always say, we’re simply here to help people like you. Now coming to your question, Richard, we would like you to know that this one of the more rare topics we come across. Wondering why it’s so rare? Well, it’s rare because the Safe Harbor 401(K) option is something that most people don’t opt for.

It’s an investment option that only complicates things, especially if you’re running your own business. So, instead of making you guess, we’ll just get down to helping your figuring out what goes on with a Safe Harbor 401(K). After you get a fair idea about the plan, you can go ahead and make a decision about whether this plan suits your needs or not.

The first thing about a Safe Harbor 401(K) is that the business owner is expected to make necessary contributions as matches. At first, these plans might seem great, but, if you have fewer than 25 employees or are okay with making the necessary employer contributions, you will have to dig deeper.

There are a few benefits to this type of 401(K) plan. You can make maximum contributions to your own account. However, you are also required to make matching “safe harbor” contributions to the accounts of your employees as a percentage of their compensations. What this means is that both, you and your employees, can increase tax-deferred contributions without being subject to the restrictions normally imposed on a traditional plan that does not need matching contributions.

The key contribution features are:

  • The maximum salary deferral contribution can be made by all participants.
  • The contributions can either be Roth deferral contributions, pretax, or both.
  • The overall contributions from employers and employees should not be above $ 52,000 or 100% of income per participant.
  • The employer must match employee contributions i.e. 100% of the initial 3% of salary and 50% of the remaining 2% of salary. Or else, they must offer a non-elective contribution i.e. 3% of salary for each eligible employee.

Here are a few things to consider:

  • Safe Harbor contributions and employee deferral are instantly vested.
  • The plan can be a complex one. You will need an administrator to oversee compliance, record keeping, testing, IRS Form 5500 filing, and maintenance.

These are some of the core features of a Safe Harbor 401(K). To access more detailed information, we suggest that you take a look at www.401keasy.com. 401K Easy has all the information you need about Safe Harbor plans.

Getting the most out of your plan

Hi, I’m Janice. As of this writing, I am in a financial soup. I need money urgently to make some payments and I was thinking whether I can do a hardship withdrawal from my 401k to get a cash infusion. However, I am not entirely sure of the ramifications. Can you please advise me on the same?

With the next presidential election approaching, it is difficult to tell what turn the economy is going to take. As the strained times continue, doing a hardship withdrawal from your 401k account is very tempting. Before you tap into the retirement savings, you need to understand the rules and have a clear idea of the consequences.

According to the IRS guidelines, a hardship withdrawal must only be made in the event of a heavy and immediate financial need. Moreover, the amount you withdraw must be absolutely necessary to fill the financial need. The employee’s need also includes the need of a dependant or a spouse. A withdrawal is regarded as heavy and immediate if you make it for any one of the following reasons:

  • To prevent foreclosure or eviction from your primary residence.
  • If you have expenses related to the purchasing of a primary residence, not including mortgage payments.
  • Education expenses (post-secondary) for the upcoming 12 months either for you, your spouse or your dependants.
  • Improvements or qualifying expenses for your primary residence.
  • Funeral expenses.

While the IRS rules make an allowance for the aforementioned withdrawals, it is not necessary that your plan allows them. Your plan provider can also limit the kind of hardship withdrawal that they allow. Withdrawing money from the retirement account sounds easy, but there are substantial drawbacks to it.

In a lot of the cases, such withdrawals are subject to taxes and 10 percent penalty, unless you meet certain criteria. In some of the cases, if an employee utilizes the hardship withdrawal, it restricts the investor from making any further plan contributions for six months or more.

Apart from the immediate costs of getting your hands on the funds from your retirement account, there are certain long-term consequences to the action that you will not realize for some time to come. The money that you remove from your account will no longer receive the benefits of compounding and growth over time. This is also applicable for contributions that are made to the plan in the restricted period following a withdrawal.

Desperate time call for desperate measures, but before you dip into your 401k to ease your financial bind, consider the immediate costs and the long-term impact on your retirement goals. If you want to get more in-depth information on your 401k, visit 401keasy.com. It is the most comprehensive 401k resource on the internet and you are sure to find answers to all the tricky questions you have.

Getting the most out of your 401k plan

Hi, I’m Tim. I’m writing this mail to you because I’m a little clueless about what to do. Well, it’s been almost a year since I quit my former company and I’m about a join a new one. But, the problem is I still have a 401K with my former employer. The thing is that I’m not interested in cashing out and paying penalties. Is there anything else I can do with the account? What are my options?”

Hi Tim. Thanks for writing in. We completely understand the situation you’re in right now. Changing jobs is exciting, but it also brings in its fair share of confusion and complications. In your case, it’s the good old 401K. Well, Tim, first off, let us remind you that your 401K funds are a very important part of your savings. So, when it comes to handling an old 401K, you have quite a few options. However, you need to see which one suits your requirements the best.

We’ll explain one of these options to you, so that you can have an idea of what needs to be done.

The first option is to leave the 401K active and under the control of your old employer. It’s not very uncommon for some companies to allow this. However, do go through your former employer’s policies on retirement plan assets to make sure you can do this. If they do provide that option, then it’s a fairly wise idea to keep the 401k with them. We say this because there are quite a few advantages. For starters, your investments will enjoy tax-free growth, while giving you time to explore various other options.

If you do retire at the age of 55, then you can start making penalty free withdrawals. Also, you might enjoy the benefits of having specialized or low-cost investment options, which may not be possible if you roll-over your old 401K into an IRA.

If your old 401K comes with certain money management services, then you might want to retain them. However, that is only possible if the 401K remains with your old employer. Lastly, a 401K enjoys more creditor protection than other investment options such as the IRA.

Now, coming to the downside of keeping the 401K with your old employer, there are quite a few. To begin with, you can’t make contributions or get a loan. Then, you’ll have to make do with a limited number of investment options.

Lastly, you may not have too many options for withdrawal. For instance, you might be forced to withdraw your entire investment instead of making a partial withdrawal.

So, Tim, this is just one possibility that we’ve explained to you. However, you do have other options, which include rolling over your old 401K into an IRA or into the new employer’s savings plan. To know more about these options, visit www.401keasy.com. 401K Easy is probably the best 401K resource you can find on the web and we guarantee that you’ll find all your answers here.

Getting the most out of your 401k plan

“Hi, I’m Janet. I’ve been interested in starting a 401K fund for my retirement. However, I’ve heard that there are several types of 401k funds and this has gotten me confused. Could you please tell me about different 401k fund options and how they are advantageous to me? Waiting to hear from you.”

Janet, West Palm Beach, FL

Good to hear from you, Janet. Also, it’s a great thing that you’ve decided to start investing in a 401K fund. A 401K is a simple way to start saving for your retirement. However, as you asked, it can be quite confusing when it comes to choosing from various types of 401K funds. Plus, employers offer their own range of funds and they name them in such a way that even similar funds sound different.

However, what you need to be aware of is that there are some basic and common funds. These are the ones you’ll come across the most and as long as you invest in any of these funds, you’re all set for the future.

Target-date funds

These are simple funds that come with a target date. The target date referred to here is the actual date on which you expect to retire. For instance, if you intend to retire in 2045, you can invest in these funds and just let them sit until you actually reach the retirement date. The asset allocations are adjusted automatically, preventing the need for rebalancing from your side. It’s a hassle-free investment option. However, there may be some extra costs and fees involved, which you need to watch out for.

Target-date funds can be rigid as well. You won’t have too much room to flex around in terms of risk.

Stock funds

Stock funds encompass a variety of stock types. You can either choose funds with small stocks or opt for funds with bigger and more established ones. You can go for international stocks as well. However, make sure you research all your stock options as you are better off investing a majority of your savings here. Ideally, most of your savings should go to stocks and the rest towards bonds.

Money market funds

The fund is basically a better version of a CD and serves as an alternative option to cash. However, the problem is that the rate of returns is limited to 1 percent per annum, which means your money does not grow with the fund. So it is best to avoid money market fund, unless you already have a substantial amount of savings, which just need a safe place to be kept in.

Blended-fund

It is like a combination of a target-date fund and a stock fund. However, a blended fund has a fixed stock-bond ratio, which is usually 50/50. So, 50 percent of your funds go to stocks and the other half goes to bonds. If you’re an aggressive investor, blended-funds are not for you. On the other hand, they are a great option for conservative investors.

Bonds/Managed income

These funds preserve your capital. You can expect little growth with these funds. However, if you have a sizable amount saved up and just want to protect the investment, with some basic growth to go along with it, then you can probably invest here.

So, Janet, we hope we’ve answered your question. However, if you want more detailed answers, please refer to the site: www.401keasy.com. The 401K Easy website contains detailed answers to all your 401K related questions and concerns.

Getting the most out of your 401k plan

Hi, My name’s Josh Tanner and I presently work as a marketing manager. I’ve been working with my current employer for more than a decade now and have a 401 (k) plan with them. Getting to the point, I’m in a financial bind of sorts now, as my daughter will be starting college soon. I desperately need the funds for her tuition fees and was told that I could take a loan on my 401 (k). Is this possible and if so, how do I go about it and what are the conditions?

Hi, Josh. Good to hear from you and your question is a very valid one. In fact, we get quite a few of these. So, to answer your first question, yes! You can take a loan from your 401(k) account. However, it all depends on the policies implemented by your employer. The 401 (k) is primarily meant to be a retirement savings fund and taking loans is usually discouraged. However, some employers do let their employees borrow from it. But, there are certain eligibility criteria to be met. For instance, some employers allow loans only in the case of medical emergencies, home loan payments or funeral expenses. Some employers don’t give out 401 (k) loans at all or there might be several conditions that you might have to fulfill. So, you will have to talk to your employer about their 401 (k) loan policies.

Secondly, as far as procedures are concerned, they are quite simple. You will, most likely, be required to fill up a set of forms. You’ll just need to enter details regarding how much you want to borrow and which investments need to be converted to cash. After which, the money will be deposited to your bank account. Other than that, you might also be required to provide specific details of your situation and provide the necessary documentation supporting it.

Here are a few more things you need to know:

  • There may be a limit on how much you can borrow from your 401 (k).
  • You will have to pay interest. Though, this interest is paid from your own account, you will still miss out on market gains.
  • You will have to pay double taxes – On the after-tax dollars which you’ll pay the loan back with and the final withdrawal which you will make at the age of 59 and a half.
  • In the case of a lay-off, you will have to pay back the loan in as little time as two months.

The positives on the other hand include low interest rates, less paperwork, and no damage to credit even in the case of a default.

Nevertheless, loans on a 401 (k) are still risky as you’ll be losing money from your retirement savings. Some employers will even prevent you from making your pre-tax contributions into the 401 (k), if you have an outstanding loan. So, think twice.

To know more about borrowing from your 401 (k) account, just visit www.401Keasy.com. The site is a great resource for all 401 (k) related queries and can come in handy.

Getting the most out of your 401k plan

Hi, I just recently quit my job to start a small business of my own. I’ve never really bothered too much about saving money, except for a few fixed deposits here and there. However, since I’m starting a business of my own, I’ve grown to be concerned about my retirement fund. While talking to a bunch of friends recently, I heard about 401(K) plans for small business owners. I wasn’t aware of a separate 401 (K) for self-employed people. Could you tell me more about this? I would like to know about the benefits of this particular 401 (K) plan.

– Richard Ortega

Hi Richard, great question. We definitely understand where you’re coming from and it’s a good thing that you’ve taken an interest in your retirement fund. Well, to start off, let me firs tell you that you are 100% right about the existence of a 401 (K) plan for self-employed individuals. Now, getting into more details, the 401 (K) Plan that you are referring to is known as a Solo 401 (K). Investment rules concerning Solo 401 (K) plans are pretty clear and direct. These plans can be operated by small business operators who have no employees or have their spouse registered as the only employee. Also, your contribution to the 401 (K) plan is not subject to your income.

You act as both, employer and employee, when it comes to a Solo 401 (K) Plan. You can make elective deferrals up to a 100% of the compensation, within the annual contribution limit. However, you need to be the primary participant in the plan. The contribution limit, as of 2014, has been raised to $ 17,500 and if you are over 50, it is $23,000.

As an employer, you are also allowed to make profit-sharing contributions. However, it must be limited to a maximum of 25% of compensation. As of 2014, the maximum amount is limited to $260,000. The total amount that can be saved in a Solo 401 (K), by both employer and employee combined, is $52,000. However, the limits are changed regularly by the IRS, depending on the inflation.

One of the better parts of having a Solo 401 (K) Plan is the amount of tax benefits you will receive. To begin with, your contributions are tax deductible and income tax is charged only when you start making withdrawals. Speaking of withdrawals, the rules are same as the ones that are used for traditional 401 (K) Plans. You are allowed a penalty free withdrawal as long as you are aged 59.5 or above. An earlier withdrawal will result in income tax payments and also, a 10% penalty. Once you reach the age of 70.5, you will be expected to take in minimum distributions from the Solo 401 (K) account. Failing to do so, will lead to a tax penalty.

Now coming to the drawbacks, we can only tell you that there are literally none. The only difficulty you might face is when you actually set up the plan.

To know more about Solo 401 (K) plans, do visit www.401keasy.com. The website is a great place to learn everything you need to about 401 (K) Plans.

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