Dreaming up perfect 401(k)

by Stephen Butler

Johnny Carson once described himself as having "a low threshold of boredom." Me too. But fortunately, whenever I feel a touch of boredom, my mind wanders toward what I envision as the perfect 401(k) plan. I start building that castle in the sky. Assuming you're curious, here's how it would look:

First, it would have some pure no-load investments chosen for all the right reasons -- low cost, high performance, a broad selection of investment types and a routine review to make sure the investments are meeting the quality criteria.

Then, it would have administrative fees paid not by me but by my employer. Why should I be paying for administration with money that could otherwise be compounding on a tax-deferred basis? Even if my employer were a little short of cash, it would make better sense for me to take, say, a $100 annual cut in pay (costing me $65 in take-home pay) rather than have what is commonly 1 percent or so of assets charged against my account for annual 401(k) administration.

I would want the plan to be operated in a way that guaranteed that I could deposit the maximum allowed by law each year. Too many so-called "Highly-Compensated Employees" (those who made more than $100,000) are cut back each year from the maximum allowable contribution, because some complicated 401(k) testing didn't pass. This happens when people, in general, don't contribute enough to the plan.

If a retirement plan's total annual contribution could be as high as $45,000 for any one person (plus $5,000 more for someone 50 or older -- for a total of $50,000), I would want to know how that extra money would be possible, given my understanding that the "max" this year was "only" $15,500 plus $5,000 more for those older 50.

I would like my employer to be contributing at least something into the plan as a company contribution. A flat percentage contribution equal to 3 percent of annual pay for everyone would be a nice gesture. That's only $900 for every $30,000 of earnings. It's worth far more than $900, compared to its pretax equivalent, considering that this $900 is tax-free without even any Social Security or Medicare deductions.

How would an employer find an extra 3 percent of pay to contribute?

As a simple suggestion that would work in most companies, we could try a company bonus plan established as follows: As a percent of gross annual revenue, the first 3 percent of gross revenue to hit the bottom line as profit stays with the company. The next 3 percent, (now a total profit of 6 percent) gets split between an employee bonus pool and the company -- 25/75.

Anything after 6 percent gets split 50/50 between the employee pool and the company. Then, the money in the bonus pool gets divided among employees based on their proportionate salaries. Employees, who realize that as much as half of every extra dollar saved goes into their bonus pool, will start acting like business owners. Others, who may be uncomfortable with accountability, tend to leave. Forget replacing them.

Those who are left would rather work harder than have replacement people chew into the bonus pool. Companies meshing this format with a perfect 401(k) have been transformed overnight.

If the bonus pool money works out to be enough to allow for a 3 percent plan contribution for everyone, the owner can typically make as much as a 9 percent contribution for themselves and/or their key managers (as a reward for being so nice.) This 9 percent of pay contribution is over and above the voluntary $15,500 contribution.

For some highly successful owners and/or managers, this 9 percent can amount to another $20,000. The 3 percent contribution also does away with the need for 401(k) testing because the plan is now a "safe harbor" plan -- a plan that guarantees a $15,500 voluntary 401(k) contribution opportunity for everyone.

Finally, there should be an adviser to the plan independent of the investment vendor -- an adviser whose objective advice can help promote the plan and steer participants toward effective financial decisions.

Again, it's always a better deal to have the adviser paid as an expense of the employer rather than as a charge against my plan earnings.

Dreaming about how your 401(k) might be improved is a terrific antidote to boredom.

Sharing this simplified description of a perfect plan with your employer may be all you need to turn dreams into an improved reality -- with maybe 50 percent more money by retirement time.

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