D2’s friend works at a start-up in NYC. The company had a 401k plan that apparently failed the nondiscrimination testing. (See https://captain401.com/blog/failing-401k-ndt-non-discrimination-compliance-testing/ for more information about the topic generally.) D2 told me that the friend says that the company has ended the plan. Is this situation something that should set off alarm bells about the company’s overall financial stability or does it fall into the category of unfortunate but not life threatening to the company? Thank you.
That seems like an extreme reaction to failing top-heavy testing. Normally you’d just make corrective distributions to the HCEs.
Sounds like the employer was only running the 401(k) so the HCEs could benefit. When they found out they’d have to make more contributions to NHCEs or reduce HCE contributions to pass, they decided it wasn’t worth it. Translated: selfish owners. Be aware.
I’ve worked with a lot of small companies on their 401(k) and pension plans. For most (but not all) of them, it is NOT about the employees. It’s about the owners’ retirement and tax breaks.
the company I work for has a traditional pension plan. there are 4 outside parties that oversee it. when the compliance/actuary(outside company who does fun stuff like review documents, federal laws and regulations…as well as does the actuary work ) tells us what to give each employee… it is than sent to an outside investment company where the company I work for never touches the money again, the employee can choose how it is invested…conservative, aggressive (by %) or choose funds etc… when they retire once documents are received and approved by the compliance people (aka 3rd party administrator) they get their money. (takes probably 4-5 days) we are always 100% in compliance with all laws and 100% funded and never touch the money nor do we have access . it is very expensive… We pay an accountant, actuary , lawyers , and the investment company that holds and invests the defined benefits.
counting down of course most employers want a top heavy plan (even if illegal)and would not even give even a $1.00 to employees for retirement if it was legal. the boss owns the company and wants to keep as much as he or she can. my boss is generous (hence a traditional pension plan) most bosses are not. bosses are human too and most people when they have a pile of cash in front of them do not want to divide it up equitably. it is a dominant human trait(IMO) not a thing unique to bosses.
I don’t know about the overall finances of the company but this would signal to me that this company is not a place that I would want to hitch my young, rising star to because it could just as easily decide to lay employees off so as not to adversely impact the owners’ profit margin.
techmom99
" a start-up in NYC" that is red flag for risk. start ups can be exciting but extra risky.
I agree. I do think that someone starting their career can afford to take a chance on a startup. After all, FB and most of the other biggies now were start ups at one time. However, if the company already shows signs of not caring about its employees’ futures, it’s not the kind of place I think will work out in the long run.
The word “start-up” sends alarm bells about a firm’s financial stability, and if financial stability is something important to the person, then don’t join a startup. However, if you are young and can take calculated risks, and why not, you can often get 5 years of experience in 2 years working at a startup. It’s exciting, it really is. For the first startup I worked for, the money I made after our IPO was life changing in a profound way. But even if it’s unsuccessful, the experience is priceless. Make sure if the company becomes worth $1 Billion dollars, that you get enough shares to make at least several hundreds of thousands of dollars. I had one offer for a startup, where with a $1 Billion dollar valuation, my shares would be worth as much as a car.
techmom99…the conversation with the parents of a person heading to the big city to work at a start up…
kid…mom/dad I have an exciting job opportunity in NYC
parents…awesome
kid…it is a start up
parents…are you asking us to pay your rent in the big city?
kid…ummmmm ummmm yes
parents…with if it does not work out?
kid… ummmmm ummmm you guys have a really big basement with a full bathroom.
parents…we paid all this money for you to go to college for you to move into our basement?
kid…it is a once in a lifetime thing…you know facebook and dell started in a dorm room, HP in a garage etc…
parents…ok just do not let them take advantage of you.
kid …love you mom and dad.
dad to mom…call the handy man we need to start fixing up the basement.
LOL! My D’s bf is working for a start up in Manhattan. For now, he is doing really well. I hope he is putting away money for his future (with or without my D, they have only been dating for 6 months) but he is living in the city with a roommate, moving to Brooklyn with the roomie and my D in a few months.
Another friend’s D has been working for a start up, not a tech company, but an online app that provides a service. She is doing well enough to live in an outer borough and pay back her student loans, but the best part is that she met a really nice guy at the job. He is looking to get into a law enforcement job and is almost there, at which point he will have real benefits and they are thinking of moving in together and getting married.
As for the basement, my 26 year old is back in his childhood room… so I know the pain of those parents.
techmom move him to the basement!
My basement isn’t suitable for a living area. It isn’t fully insulated and it’s where the laundry room is. I actually don’t mind having him here, since the 17 and 20 year olds are also at home. My h had knee replacement surgery recently and the boys have been very helpful. I don’t know that I could manage his rehab alone since I am out of the house all day at work and have no car that I am able to drive at this time. H is having the other knee done in December, so I will need his help again.
If he was the only one, I’d feel differently. He starting working for the federal govt about 6 months ago and is hoping to move out in about a year.
Top-heavy plans are allowed – but employers have to make a contribution to all the pother employees to pass compliance testing. Part of my job was performing that compliance testing and then letting employers know how much they’d have to contribute for each person, and communicating to them that this meant ALL eligible employees, not just the long-timers, partners or favorites.
I keep wondering if S1 will take a start-up gig at some point. He’s not the entrepreneurial sort, but he has the big-picture/big data mindset, and that could be part of an interesting setup. I do know he would talk to us about it before he made a move. At least he’s been stashing $$ away so he has a nest egg in case he were to take the plunge.
In my prior job, pre-downsizing, I was an HCE. I used to talk to new, young employees about the benefits of contributing to the 401 (k), mostly because it really is a benefit to them but also because having more lower compensated employees in the plan helps everyone. Nowadays, I encourage younger people to get the match on the 401(k) and then do a Roth for the later on tax benefits.
When S1 got his first job, he asked me to look at his employee benefit stuff. First thing I told him was that no matter what, put enough in the 401(k) to get the maximum match. I tell the same thing to my nieces and nephews as they are joining the workforce. Don’t leave money sitting on the table!
You are so right. There’s a young man who just joined my company. His parents are immigrants and he didn’t understand about the benefits. I told him to start contributing as much as he can for the match and then to do a Roth. He still lives at home.
I told my D to put into a Roth and that if she needs to, she can use it for a down payment on a house in the future. I made my down payment by means of a 401 (k) loan but a Roth is better.
it is hard for a 21-25 year old to grasp planning for retirement.
Yes, it is but I began contributing to a pre-1986 IRA in 1983, at age 23, and joined my company’s 401 (k) plan at the earliest point in time. Perhaps it was because I grew up in a housing project and knew I had no inheritance coming to me and no parents to rely on that I began to save so early. My kids have had a more fortunate life but I have drilled into all of them the importance of retirement savings. In fact, S17 is already enrolled in our state pension system because he worked for the school district one summer and I insisted he join. He has about $47 in his retirement account!
$47.00 dollars more than most people even in their 20’s
Sad, but true. My 26 year old is not a saver and I am desperate to get my hands on his work information and set up an account for him when he’s eligible to begin contributing. At least, he’s eligible for a pension.