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Is Your 401(k) Up To Par?

This article is more than 10 years old.

retirement (Photo credit: 401K 2012)

By surveying a sample of the 500,000 401(k) retirement plans covering 60 million Americans, the Internal Revenue Service has put together a handy list of what features employees can expect—or demand—in their plans.  Policies on employer matching, vesting, after-tax contributions and the like all have an impact on your potential retirement nest egg.

The questionnaire covered 1,200 plans (plans that didn’t respond were audited!). The Interim Report is available here, and a more detailed report is due out by the end of the year.

In the meantime, employers can use the list as a benchmark and decide whether they ought to amend their plan to add new features or enhance existing policies, says Thomas McCord, an employee benefits lawyer at Nixon Peabody in Boston. And employees can use the list to drum up support for what they’d like added to their plan. One of the main reasons employers don’t offer certain features is because they say they haven’t heard employees clamoring for it, McCord says.

For example, only 22% of 401(k) plans surveyed offer a Roth option within. And 65% of employers whose plans don’t offer a Roth option say it's because they “think” employees would not be interested. Yet Roth savings can be very powerful as the earnings and eventual distributions are tax-free, leaving retirees with a tax-free bucket to draw on when managing their retirement income and retirement tax bracket. For 2012, employees can contribute $17,000 a year to a 401(k) account, or $22,500 if they are 50 or older.

Another feature that might find more takers if it was offered more broadly is allowing employee after-tax contributions (separate from a Roth option). Only 4% of the plans surveyed allow these after-tax contributions. Yet the survey found that 67% of employees who were making after-tax contributions increased the dollar amount of those contributions between 2006 and 2008, suggesting that this feature is a valuable one for certain employees.

Here are some of the other key design features and the percent of plans surveyed with that feature, according to the IRS survey:

No age requirement to sign up (20%)

No service requirement (minimum time on the job) needed to make contributions (13%)

Employees can change deferral elections at any time (41%)

Catch-up contributions allowed for employees at age 50 (96%)

Employer matching contributions program in place (68%)

Permit after-tax contributions (4%)

Hardship distributions permitted (76%)

Employee loans permitted (65%)

For a look at the “crucial” role that 401(k) plans will play in the future of Americans’ retirement readiness, check out this speech The Investment Company Institute President/CEO Paul Stevens gave earlier this month at Town Hall Los Angeles.