Buried Treasure in your 401(k)

More than one client has asked us; "Why am I stuck in my employer’s 401(k) plan? The plan only has only a few or poor investment choices!"  In most cases, plan participants are stuck.  But check the fine print of your plan, there may be a way out.  To learn more, look at the "Summary Plan Description".  This is a document you receive when you enroll in the plan and provides all of the details about how your plan works.  If you do not have this document, you can request a copy from your human resources department or the plan administrator.  It is likely to be available as a PDF file for immediate access. 

                                                                      Muir Woods, Marin County, California

                                                                      Muir Woods, Marin County, California

The provision you are looking for contains the language about "in-service, non-hardship withdrawals." In other words, you want to access your money while you are still working for the company and not because of a hardship such as disability.  The ability to make this kind of rollover is neither required nor prevented by the Internal Revenue Service or the Department of Labor. You may not find these provisions in more recent 401(k) plans. Plans that allow it are typically offered by older and larger companies that are able to offer customized, more feature-laden 401(k) plans to their employees.

An important note, we're not speaking of a literal distribution or withdrawal from the plan, even though the language reads "withdrawal." What actually occurs is a “direct rollover” from the 401(k) into another retirement plan, such as an IRA. Under normal circumstances, these rollovers occur only if when leave your employer and want to take your 401(k) assets with you. But "in-service" withdrawals allow you to gain control of your 401(k) assets while you are still employed with your present employer.

The reasons you may want to exercise this option are the desire for more control over your retirement money; for many investors this means significant dollars either in cost savings or potentially improved performance.  The typical 401(k) plan will have a short menu of mutual fund alternatives, sometimes from the same fund family.  By taking control of your plan assets, you will have the ability to invest in over 10,000 mutual funds, separately managed accounts, low cost index funds, individual securities, FDIC insured certificates of deposit, precious metals, real estate or the full range of alternative investments such as private equity and hedge funds.

Remember, these withdrawals aren't cash that you can spend as you like. The money is given to you as a check made payable to your IRA custodian. Once the funds are in your IRA, they are subject to all the rules that govern IRA plans.  You will still maintain your existing 401(k) account which will receive your future contributions and company match (if applicable).  The main point of this discussion is simply to make you aware of the possibility that you may be able to exert more control over the bulk of your 401(k) assets by rolling them over into an IRA.    

Though there is significant employee interest in these rollovers, most companies that offer them don't promote the option because they don't want to encourage it.  Human resources personnel are reluctant to provide any direction regarding your plan for fear that it would be considered “advice” and they could be liable.  And it should come as no surprise why your 401(k) provider would not make an effort to educate participants about a way to remove money from their management.
 
Depending on your specific plan, the terms of the withdrawals can vary widely. For example, a company may allow employees to withdraw only their own contributions and not any company matching contributions. Also, the plan may set limits on the amounts that may be withdrawn or the number of withdrawals that may be made in a given period.  In all cases, take a look at your “Summary Plan Description”, there may be buried treasure in your plan.