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When does doing an in-service?

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?

Dec 27, 2012 by Kevin in  |  Flag
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17 votes
Herbert N Glass Level 18

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:

  1. Pick which IRA investments you would choose which would make up your whole portfolio and determine how much money you would be investing in each fund.
  2. Determine how much the total investment and/or fund fees would be for your theoretical IRA portfolio, and compare that amount of fees to the amount of fees that you would be paying in your 401(k) plan (a) assuming that you were investing the same dollar amount you just assumed that was being invested in the IRA portfolio, and (b) assuming a similarly designed portfolio (fund choices) as you picked for the theoretical IRA portfolio.
  3. Make sure that you are getting all the proper fee information for all investments you are using in No. 2. , above.
  4. Then determine what value added, if any, the benefits of investing in a 401(k) plan provides, such as, the fact that professional investment managers and/or the 401(k) plans' fiduciaries have added by selecting funds, in which you may invest, from the whole universe of funds that are available, etc.
  5. Then you should determine if the value added to your portfolio by the factors in No. 4 above and the time you may be saving by not "doing it yourself" if you we're investing in an IRA offset the extra fees you may be paying in the 401(k) plan.
  6. Keep in mind that fees and expenses should always be just one of the factors you take into consideration with most buying decisions unless you are getting the exact same product or service from each vendor. And when investing, it is easy to understand that if the amount being earned is higher after taking into consideration the fees being paid, then it would make sense to pick the more costly alternative because the extra results will offset any extra expense being paid.
  7. So, the conclusion is that there is more to reaching a conclusion to your question than just comparing fees and expenses. You must do some more work and thinking about what you think would be better for you to do, and then either move the money to an IRA or don't based on your complete analysis of all the factors and issues I have described here.
  8. With respect to your question as to how often you should move money to an IRA, assuming that you want to, just make sure that you first get your match that is a gift from your employer, and take into consideration that you have to overcome the $30 extra fee eventually by any expense savings and extra earnings (if there are any), then you can transfer money as often as you like as long as the plan has no restrictions to how often you can make such withdrawals.

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

Comment   |  Flag   |  Dec 28, 2012 from Franklin, MI

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13 votes
Jonathan Foster Level 16

Hi Kevin,

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!

Jon Foster

Comment   |  Flag   |  Dec 28, 2012 from Santa Monica, CA

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8 votes

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

Comment   |  Flag   |  Dec 28, 2012 from Long Beach, CA

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Peter C. Karp Level 20

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.

The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.

Comment   |  Flag   |  Dec 28, 2012 from San Francisco, CA

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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.

Comment   |  Flag   |  Jan 14, 2013 from Delray Beach, FL

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