My employer has a 4% matched 401(k) but the investments have net operating expenses between 0.70% and 1.34%. I know I can get IRA investments closer to the 0.20% expense ratio. My 401(k) has a $30 fee for in-service distributions. Should I consider doing an in-service distribution into a lower cost IRA, and if so, how frequently?
Interesting question! But, before I would move your money from the 401(k) Plan to an IRA, and assuming you can based on the plan document provisions and you having already checked with your employer, I would recommend the following:
I hope some of these details I have mentioned here are helpful to you when you are making your decision of what you believe the right choice is for you.
Have a Happy and Healthy New Year,
Herbie Glass Certified Pension Consultant
First and foremost, you need to consult your tax advisor before making any decisions here.
Your frustration is totally understandable. 401k Plans are generally not as competitive from a cost or investment choice perspective as a self-directed IRA. Hopefully the introduction of the In-Service Distribution option will force these plans to become more competitive.
I am assuming that you are at least 59 1/2? Before that age, you cannot do a 401k In-Service Distribution to your IRA. Additionally, not all 401k plans allow this, so check with your HR department or administrator for the details. You should also make sure that you keep the company match if you do this. The most important feature of your 401k is the 4% company match!
Another important issue is how your company responds to your desire to pull money out of the plan. Some companies react quite negatively. An alternative course of action is to get involved in the process of restructuring the 401k Plan to be cheaper and better. Volunteer to sit on a committee.
FYI, if you are looking at expense ratio solutions for your IRA of only 20bps, you must be only considering super low cost ETFs & Index Funds, probably without any active management at the asset allocation or investment selection level. This puts ALL the investment burden on you, so make sure you think you are qualified to do this. Good investment advice can be worth paying for!
Kevin - The in-service distribution of an employer match is a little known "benefit" that many people are not aware of. Many plans will not allow it, but if your plan does, I would certainly take advantage of it. Not only will you reduce the management expenses (you pointed out) but you will also gain tremendous flexibility in your investment choices by moving out of the 401k plan. As far as how often you should do this, I agree with Herbie's #8 point. Take care and I applaud you on being proactive with your investments. Take care - Marcus
Kevin, First things first, you HAVE to be 59 ½ for an in-service withdrawal from your 401(k) plan. No matter how much you dislike your current plan and you want to withdrawal it all, it’s not an option until then.
Do not be driven just by fees. You may be able to find funds with lower expense ratios for your IRA but you will be paying additional fees to maintain the account and you cannot take distributions from the IRA until age 59 ½ . Taking an in-service distribution may affect your ability to contribute to your employer sponsored plan. Be sure to check with your plan administrator.
From an estate planning perspective, IRAs offer flexibility but are not protected from creditors. You may have more investment options outside of your 401(k) plan however it could be more costly than the investment options within your 401(k). A lot depends on your time horizon and investment goals and an effective asset management strategy. The effective management of your assets should be your focus. You should consult with a knowledgeable advisor and accountant before moving forward.
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There is really a lot more to investing than fees. Expense ratios of .70% to 1.34% are typical for actively traded funds, and expense ratios of .20% are common for some index funds. The debate over which type of investment is best will go on, perhaps forever.
Make an educated and knowledgeable comparison of risk adjusted returns over different time periods of the two different types of investments,
It is good that you have that option available. Unless you are either a savvy investor, you have a very specific, well thought, retirement related investment that you are interested in, or have real problems with the performance options of your 401(k) plan, I would typically not see a benefit in an in-service distribution. Look for a compelling reason; I know others will disagree, but I do not see just 1% in fees as a compelling reason.