Employee Deferrals - how long is too long? Does a long lag affect ear

[Guest jkrainak]

Our company has recently switched 401k plans and something just came to my mind. When money is deducted from my paycheck every two weeks and transferred to our accountant who transfers it to our 401k -- doesn't this take some time? Doesn't this time add up to a lot of time in the long run? I have read that by law you have until the 15th of the following month, and to be sure ours doesnt take that long. But doesn't even a few days every month over say 10 years mean a lot less earning potential?

So with this "logic" I'm going to approach our inhouse bookeeper and find out the skinny. My question is how long is too long? We are a small company with a brand new self-directed TD Waterhouse 401k plan. I believe we are relying on regular old mail to move money from us to the accountant (I dont think we wire transfer or do it electronically). Is there a way to show them how much earning potential we could be missing out on (I might need to convince them a bit). Also, what are our alternatives - is wiring money simple? Should our accountant be taking care of this?

Thanks for the help.

Jonathan

[R. Butler]

You need to see the discussion entitled "DOL dings up...." started by K Man under the 401(k) topic.

[Guest jkrainak]

Actually, I did read those but am still a bit confused. Even if the deferrals were deposited in a "timely" manner, wouldnt that still mean many many many days in the long term? I mean, lets say you're paid every 2 weeks, and the employer deposits once for each pay period (twice a month). Each one of these deposits takes 5 days. That's 26 pay periods times 5 days (obviously). Well, over 10 years that is a total of 1300 days or 3.5 years. That's 3.5 years where your money was not invested. That is to say your deferrals were not invested - not total 401k.

I guess what I'm wondering is whether or not this is normal? It IS normal according the DOJ - but not normal from an investment standpoint (or at least not smart).

As it is right now - our company DOES indeed have a lag time of about 5 days per deferral.

Thanks again.

[R. Butler]

I can see your point, but I am not sure there is a solution. If your employer is in fact remitting deposits within 5 days of each payroll period, that employer is doing a better job than a vast, vast majority of plans. Its probably not administratively or economically feasible to remit deposits any quicker than that.

[Guest jkrainak]

I agree - this lag time seems to be pretty normal. However, it really is quite unacceptable. I think we are going to look into exactly why this lag exists. I believe it is simple - paperwork or snail-mail. I also found out the many many companies simply wire the money -- which may be exactly what we need to do.

Thanks for your reply

[KIP KRAUS]

I agree with R Butler. My advise, don't rock the boat. Unless you are putting all of your money in a guaranteed account 4 or 5 days for the next 20 years won't mean beans in lost or earned income on your investments.

[Guest jkrainak]

I'm not so sure that is true. Let's say every month you have $500 that is not invested for 10 business days. How does this not amount to beans after 10 years? In fact them's some pretty good beans if you ask me.

And why not rock the boat? Fixing this would not just benefit myself, but everyone else in the company -- including the accountant! Many companies are already making there deferral contributions via wire transfers; and not because some whiney employee -- because its smarter money for everyone.

Jonathan

[Guest Rudy]

If you are intent upon speeding up the time between deferral and credit to the plan, you will probably have to change providers.

I work at a financial institution, and we have a procedure that ensures the funds are deposited by the day following the employer's stated pay date:

1. The employer must have a commercial account.

2. Contributions are submitted via the internet on or before the stated pay date.

3. After processing, we debit the client's commercial account as authorized.

This procedure works well. The catch is that the client must have a commercial account.

For our clients without a commercial account, they still submit the data electronically. However, the funds are sent the old fashioned way. This takes anywhere from 3 to 5 days on average.

I hope this helps. As the others have said, your situation is not unusual. I am sure there are participants out there that would love to have your 5-day time lag in their plan.

[Jon Chambers]

The real problem is the self-directed brokerage account, through TD Waterhouse, or through anyone else. First, the cashiering function (process of splitting deferrals to individual employee accounts) is much more complex in a self-directed brokerage account than it is in a more typical pooled investment option. Companies that wire funds typically make an omnibus purchase for all employees in the same investment option. This is often on pay date. It's not uncommon for employees with brokerage accounts to find that it takes an extra 5 - 10 days before funds are deposited to their individual accounts.

Let's assume your 5 day estimate is correct for your company. Your contributions go to a money market fund, which in today's environment, earns about 5% per year. So, take your $250 contribution, times 5%/year, times (5 days/365 days) = $0.17 each time your contribution is late. Over 26 pay periods, you "lose" $4.51 per year.

The real problem is the low return on uninvested funds in a brokerage account. Funds don't get invested until you elect to deposit them. Instead they go to the money market. You probably only trade your $250 contribution to purchase a mutual fund every couple of months, after you amass $1000 or so. Given that a mutual fund may earn 10%+/year, the 5% differential between the the mutual fund and the money market for up to a couple of months DOES add up to some real money. I'd suggest that you should lobby to replace the brokerage accounts with a more appropriate pooled fund structure.

[Guest jkrainak]

Thanks for the information. The self-directed aspect of things does seem to be more of an issue.

Jonathan

[actuarysmith]

I do not mean any offense to the author - he is asking a reasonable question. However, in my experience his company is doing a fine job of remitting deposits on a timely basis compared to the plans we see. (Our firm services over 1,200 plans).

As far as the specific example eluded to above - $500 a month being deposited 10 days "late". I did a quick and dirty calculation and it really does not amount to much.

For example, let's assume that you would have earned 10% annually on your deposits. Using simple interest (keep it simple for us actuaries!) for 10 days - that's $500 x 10% x (10/365) = $1.37 !! per month that has been "lost".

If we plug this result into our financial calculator and accumulate this for 10 years, we get a whopping $ 282.98 (Whoopee!)

Say, what does a hill of beans go for these days?

[Guest jkrainak]

No offense whatsoever, that is why I'm posting these questions.

I can see your logic (along with a similar post earlier) and it makes more sense to me now. In fact, I just got off the phone with our advisor and he said pretty much the same thing.

Knowledge is power

[k man]

You also have to consider the size of the employer. if the employer has multiple locations and payroll is done from more then one location, it might take the employer longer to gather the data needed to calculate how much to remit. also, the rule states that the money only needs to be separated from the employers general assets and becomes part of the plan no later than 15 days after the last day of the month in which it is collected. you will not lose that much if it is only invested in a money market account.

also, as i stated earlier in another post, it is reasonable for a company to charge plan sponsors extra fees to allocate money more frequently then twice a month. this expense will invariably be passed on to the participants. thus, in end you might not be benefiting at all.