Question

Kryptonite is a telecommunications provider in Iowa with hundreds of thousands of employees. Their CEO, Clark Kline, is considering the replacement of their expensive defined benefit (DB) pension plan with a 401(k) where the employees will bear the investment risk. The majority of the workforce young and the top executives are all in their 50's and 60's. 1. As Clark's top financial advisor, what type of qualified retirement plan would you recommend instead of the 401(k)if he wants the majority of the benefits to accrue to the top executives? 2. An intern who works for you recommends utilizing a DB/K plan. What is your opinion of using such a plan in this case? 3. Who would benefit the most from the change away from the DB plan to a 401(k)? 4. What is the maximum contribution to a 401(k) of a worker age 56, who earns $20,000 per year and is a factory worker with Kryptonite? 5. Lois Kent has been with Kryptonite for 10 years but is nervous now that Clark has taken over operations. She wants to know her options regarding taking money out of the 401(k) at a later date. You directly tell her that she can access her 401(k) funds without penalty under what 7 circumstances? 6. Clark has heard that the ADP testing is an issue for 401(k) plans. What are three ways to minimize this issue?

Answer 1

Answer 1
The CEO - Clark Kline desires that most of the benefits accrue to the senior executives who are in their 50s and sixties.
One of the better options available to him is the Roth IRA

The Roth IRA tends to benefit the older employees more than the younger employees since contribution to a Roth IRA is on an after-tax basis, but withdrawals are tax-free after the age of 59.5 years. Since most of the senior employees would be crossing this age limit much earlier than most of the other employees, they will be able to enjoy tax-free withdrawals in the near future. The younger employees would prefer the normal IRA plan since their contributions will make them eligible for tax rebates, thus their in-hand salary would increase. Since time is on their side, their retirement fund in either case has a long time to grow.