A few weeks ago I wrote about some of the reasons why you wouldn’t want to invest in your company’s 401k plan. The primary reason, by a long shot, was when the costs of the plan outweigh the benefits (sing along with me: “if your expense ratio starts with two, then you, my friend, are screwed.”)
What about the poor sap who has been a loyal and active participant in his or her plan for decades? Well, there may be a way out—and this way out may be attractive even for participants whose 401k plans are even “just okay.” The way out goes by the enticing name of In-Service, Non-Hardship Employee Withdrawals, or just plain old in-service withdrawals.
In a nutshell, this allows employees who have met certain minimum standards to withdraw part or all of the vested balances in their 401k plan and roll it directly into their IRA. In doing so, the yoke of the plan—whether it be high fees, limited investment choices or both—can be removed.
Importantly, you can still participate in your 401k plan if you so desire. But if you roll a substantial portion of the existing balance into an IRA, while the fee percentage may be the same, the financial hit to you would be lower. Let’s say your fees are 2% a year, with a $1 million 401k balance you’ll pay $20,000 a year, but only $200 a year for a $10,000 balance. The percentage may be the same, the amount differs greatly.
In addition to reducing your annual fees, most companies you might consider for an IRA such as Fidelity, TD Ameritrade or Etrade, charge little or nothing annually and have thousands of investment options with very low (or even no) annual fees. If you want, you can also invest in individual stocks and bonds, something generally not available within most 401k plans.
Eligibility criteria differ, but for many plans this option is available for employees over 59½ and with at least five or 10 years at the company. A quick note: if you are between the ages of 55 and 59½ and are considering withdrawing funds from your plan, an in-service distribution may not make sense, as you have greater flexibility to withdraw from a 401k plan without penalties during those 4.5 years than you do with an IRA.
Folks, a big caveat here: this is a very significant financial transaction: before doing anything other than pondering, talk with your financial and tax advisors. This is not something you want to get wrong. There are other possible fees and expenses such as charges by the 401k company to distribute, potential loss of protection from creditors of your 401k/IRA assets, possible penalties if you have an annuity within your 401k (though I surely hope you do not!), etc.
Your 401k plan is a vehicle for tax-efficient savings….but hey, a hearse is a vehicle too, and I have little interest in being in one. Look closely, and realize there may be alternatives!