Jump to content

Does it make sense to roll out of the § 401(a)-(k) plan?


Recommended Posts

Here’s my friend’s situation:

She is her S corporation’s 100% shareholder. She is, and always has been, the corporation’s only employee. For many years, her § 401(a)-(k) plan has every year received her maximum (including age 50 catchup) elective deferrals as Roth contributions. Every year, she provided herself a nonelective contribution of 25% of compensation. These two subaccounts are a seven-figure sum.

She received Vanguard’s letter “Your small-business retirement account is moving to Ascensus[.]” She would prefer to keep her § 401(a)-(k) plan at Vanguard, but that’s impractical.

She would prefer no more than small accounts at Ascensus. Why? According to Vanguard, the Ascensus accounts will not be displayed in her Vanguard website. All her investments are with Vanguard. She likes using Vanguard’s website as a one-stop.

To get the desired display, she is considering a rollover (she’s distribution-eligible) of all but about $1,000 of her nonelective contributions subaccount to a new non-Roth IRA, and a rollover of all but about $1,000 of her elective-deferrals subaccount to a new Roth IRA.

She would do this before the mid-July transition to Ascensus.

The reason for leaving non-zero balances in her two § 401(a)-(k) subaccounts is so she’ll get recordkeeping on the terms Vanguard arranged with Ascensus. She intends to continue her business, and to continue the maximum elective-deferral and nonelective contributions.

After each year’s contributions, she would direct two partial rollovers into the two Vanguard IRAs, which would never get any contribution beyond rollovers from the § 401(a)-(k) plan. She would leave in the § 401(a)-(k) plan enough to pay Ascensus’ fees.

BenefitsLink neighbors, does this work?

Any reason my friend shouldn’t do this?

Any caution I should explain?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

Any possibility that leaving only $1000 would pay force the account(s) to pay proportionately higher fees?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

Link to comment
Share on other sites

Dear Peter,

David is correct, it would be prudent to check the extent, if any, to which account balances may affect the administration fees, including rollover fees, all of which I suspect will be relatively small

Regardless of whether there are any rollovers, I would verify who will be responsible for maintaining the plan documents after the accounts are moved to Ascensus, and if the documents will change, check whether there will be any substantive changes in the plan documents, including beneficiary terms.  If so, some additional work may be required to keep the designations consistent.

 

The plan is not one-person plan, thus not an ERISA plan. I would check local law to see if there are significant differences in  rights of your friend’s creditors depending on whether the funds are in an IRA or in the plan accounts.

Best wishes,

Albert

Link to comment
Share on other sites

I would do this in a heartbeat. David, even if the fees were somewhat higher, Peter is talking about getting more than $1M out of the Ascensus arrangement which I think would be well worth it.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

Link to comment
Share on other sites

David Rigby, Albert F, and CuseFan, thank you for helping me think this through.

According to both Vanguard and Ascensus, the new fees are, for Ascensus’s directed trusteeship, $20 a year for each participant, and for “Ascensus’s annual account service fee”, $20 a year for each fund. (None of Ascensus’s fees relates to assets under recordkeeping, and the fees are not subsidized by indirect compensation other than float income.)

My friend invests in only one target-year fund for each of her two subaccounts. So, she counts her Ascensus yearly fees as $20 + $20 + $20 = $60.

She qualifies for no account fee on Vanguard IRAs.

While $60 is a higher proportion (300 basis points) of $2,000 than it is of $1 or $2 million, I’m not seeing a less expensive path to getting recordkeeping for her § 401(a)-(k) plan.

I fear Ascensus after 2024 might add a distribution-processing fee, even on rollovers. (That’s among the reasons my friend wants to do rollovers now before the transition to Ascensus.) If a processing fee comes, it might influence how often she moves amounts from her Ascensus-recordkept § 401(a)-(k) plan into her IRAs.

Ascensus provides the plan-document service. I’ll edit the adoption-agreement choices. And I’ll edit even base provisions as much as can be without defeating the IRS preapproval or causing Ascensus to resign.

About creditor protection: A reason for keeping each IRA clean with no contribution beyond the rollovers from the § 401(a)-(k) plan is to get the 11 U.S.C. § 522(b) exemption from the bankruptcy estate without limit. I have not researched other bankruptcy law, nor a creditor’s rights outside bankruptcy. But lacking an ERISA protection or preemption on even the employment-based plan, I’m hoping she doesn’t lose a useful protection by moving to the IRAs. We can check with a debtor’s-rights lawyer.

Other points I should think about?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

The scheme is intended to allow the individual to maintain the 401(k) plan and take advantage of the higher levels of contributions.  The simplest approach is to make the IRA rollovers out of the existing plan. 

Next, adopt a prototype plan owner-only plan and set up a bank account in the name of the trustee of the plan.  She can deposit her contributions into the account and then make the rollovers into the respective IRAs. She can keep a very small amount in the bank account and will not have to file a Form 5500-EZ.  Further, with the bank account there likely will be no income to have to worry about any separate accounting between the deferrals and the NEC.

She will need to prepare two 1099Rs each year for the rollovers to the IRAs.  As rollovers, there will be no tax withholding to deal with. 

None of this is technically challenging.  If she feels it is still a hassle, there are local TPAs or CPAs that can do this for a small fee.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...