Question

Kryptonite is a telecommunications provider located in Iowa with hundreds of thousands of employees. Their CEO, Clark Kline is considering the replacement of their expensive defined benefit (DB) pension plan which requires large contributions every year with a 401(k) where the employees will bear the investment risk. The majority of the workforce is young and the top executives are ll 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?

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.