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Can I move my balance from my employer's 401k to a traditional IRA?

I am not happy with my employer's 401k. They suck out a lot of money in fees/sales commissions. For example, for a passive index fund like Vanguard, I pay 1.32% in fees, but I could invest in the same fund through Schwab and pay .17% in fees. Over time, that will cost me $100K in fees! I want out. Can I move my balance from my employer's 401k to a traditional IRA? I have asked my employer but I got a vague answer. It seems there are two issues: 1) Are there IRS withholding tax consequences? According to the IRS: "Withholding does not apply if you roll over the amount directly to another retirement account. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding." 2) Will my plan provider/employer allow it? Does the law allow the plan provider/employer to refuse to move money out of their plan?

Jul 25, 2013 by margaret from Seattle, WA in  |  Flag
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4 votes

Margaret,

As far as moving your 401(k) to your own IRA the short answer is that it depends on the plan itself. Some plans allow you to do this and other plans do not. I have seen plans that require and individual to be 59 1/2 first and others that require you to no longer be an active employee. I would check with your HR or plan administrator to find out. Explain to them you want to move it to your own IRA at another custodian and want to see if the plan allows it.

You are correct about the fees being high. For a Vanguard Fund, 1.32% seems a bit high. Especially if it is just an index fund. Without know the exact fund I can't say for sure though. I would check on your statement in the section that shows all the funds available in the plan. Usually they show the fund expenses.

Good luck

Comment   |  Flag   |  Jul 25, 2013 from Uniontown, OH

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4 votes

Wow, that is a lot in fees. If your numbers are correct, you do have a valid compliant. One very important bit of information is missing from your story. Do you still work there? If you do and you are under the age of 59 1/2 you are likely out of luck. If you are over 59 1/2 and/or have left the company you may roll the funds into an individual retirement account (IRA).

Either way this may be an opportunity for you to help your employer understand what too many do not. that fees matter. A retirement plan does not have to have such high fees. If your employer took their role as a fiduciary seriously they may even be inclined to change it. Who knows, you could wind up being the hero who saves the company and its participant employees a lot of money.

2 Comments   |  Flag   |  Jul 25, 2013 from Kingsport, TN
margaret

Thanks everyone for the advice. I am 51 years old. Right now I am not working for this employer. I have not received a paycheck for any work in July. I am waiting for the client to sign the paperwork for the next project. This will happen within the next 3-4 days. Is a month enough time for a "termination", so that I'd be able to withdraw my money?

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Flag |  Jul 25, 2013 near Seattle, WA
John Atkins CFP®

Most employers will want to make sure that there is not a deposit in transit that has not hit your account yet. One month seems like a sufficient time to make sure that will not happen. Contact your old employer and ask them for termination distribution forms. Make sure you have it processed as a rollover to your IRA and that way there will be no tax consequences. Best of luck to you and good eye for catching those fees. That really is high.

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Flag |  Jul 25, 2013 near Kingsport, TN

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3 votes

I see the new fee disclosure regulations are starting to have an impact already. As for your question: What they said. If you are not eligible for an in-service distribution, then make your voice heard that you want a lower cost plan!

3 Comments   |  Flag   |  Jul 25, 2013 from Bridgewater, NJ
margaret

Yes, I have been crusading on this issue for two months. When I dig for more details, I get a lot of vague answers, obfuscation, and the response: "it's complicated". I have made my voice heard, but it doesn't seem to change anything---as you can see from the email communcattions below: THE EMPLOYER RESPONSE TO MY EMAIL

Hi Margaret,

Thanks for all of your feedback. We’ve researched the issues that you raised and feel that, at this time, our offering is competitive with the marketplace for plans of our size.

I reached out for an answer on your distribution request and received the following:

Yes – a participant can withdraw their money once they have terminated employment, given they are fully separated from service and not on call or part time, etc. If the participant were rehired within a short period of time however, the distribution might be flagged as ineligible and may face penalties from the IRS. Therefore – if the participant plans to return to work within less than 6 months or so, they shouldn’t plan to take a distribution. It’s a bit of a grey area so it can be a bit convoluted to interpret – but if you have specific time periods or a scenario to consider, Larry or myself can help determine if it will be an issue.

Thanks,

{Name redacted} | Distributions Manager

Please let me know if you have additional details relating to the amount of time that you think you’ll be without a project or how you’d like to move forward.

MY EMAIL TO EMPLOYER

Hi {Employer Plan Administrator, HR Mgr, Plan Provider Sales Agent}:

Thanks for your responses as I researched the {Employer Name} 401K plan. Below are my observations and asks:

Observations:

· There is a good variety of funds to enable diversification.

· It would be great if {Employer Name} offered a match. The financial benefit of the match could compensate for the high fees.

Asks:

As an employee and plan participant, I have three asks for the plan administrator. (see below) Not only would I benefit from these changes, but all 110 {Employer Name} employees/401K plan participants would benefit.

{Employer Plan Administrator, HR Mgr}

Would you please look into these three issues and provide a response back. In the meantime, I’m not working right now. (The client is preparing an SOW for me for next year, but it hasn’t come through yet.) So since there is a break in my employment, would it be possible for me to withdraw my money from the {Employer Name} 401K and roll it over to my qualified IRA?

Join Brightscope.

This service will help track to what extent the plan helps employees retire with enough money and how {Employer Name}’s plan compares with other companies of the same industry and size. Go here for details: http://www.brightscope.com/401k-rating/333457/{Employer Name}-Corp/338210/{Employer Name}-Corp-401K-Plan/

Reduce the investment fee on low-cost passively managed funds.

For example, if I buy the Vanguard LifeStrategy Growth Fund through {Plan Provider Name}, I pay .92% annually on my assets. That’s in addition to the {Plan Provider Name} CAC/Asset Management fee of .4%. But if I buy the same fund through Schwab, I pay .17%. That’s a .75% difference, which given that index/passively managed funds tend to perform at the market/benchmark rate, there may not be a lot of profits to spread around to begin with. These Vanguard funds listed below are not actively managed. They do not require significant research and monitoring services generally associated with higher fees funds.

Vanguard LifeStrategy Conservative Growth Ret Opt
0.9 Expense Ratio listed on {Plan Provider Name} site
0.15 Expense ratio listed on Schwab
0.75 DIFFERENCE BETWEEN {Plan Provider Name} EXPENSE AND LISTED EXPENSE RATIO
vscgx ticker symbol

Vanguard Target Retirement 2015 Ret Opt (Perf. Incp.: 10/26/2003)
0.91
0.16
0.75
VTXVX

Vanguard Target Retirement 2020 Ret Opt (Perf. Incp.: 06/06/2006)
0.91
0.16
0.75
VTWNX

Vanguard LifeStrategy Growth Ret Opt
0.92
0.17
0.75
VASGX

Vanguard Target Retirement 2025 Ret Opt (Perf. Incp.: 10/26/2003)
0.92
0.17
0.75
VTTVX

So I suspect that the .75% markup is for sales commissions---which I guess is great for the middlemen, but it has a MAJOR impact on employees’ nesteggs. Over the life of the 401K they’ll lose more than $100,000 in fees.

Provide visibility on all fees charged

This includes:

· Plan Administration fees

· Investment Fees

o Sales charges, (loads, commissions, redemption fees)

o Rule 12b-1 (indirect compensation, revenue-sharing fees, asset-based fees, commissions to brokers and other salespersons, advertising and other costs of promoting the fund to investors)

o Management fees (investment advisory fees or account maintenance fees)

o Collective Investment Funds (if applicable)

o Variable Annuities (if applicable)

o Pooled Guaranteed Investment Contract Funds (if applicable)

o Other fees (recordkeeping, furnishing statements, etc.)

· Individual Service Fees (loan services, etc.)

· Explanation of which fees are paid by {Employer Name} versus the employee.

See this Dept. of Labor document for more details: http://www.dol.gov/ebsa/publications/401k_employee.html

Some of this might be covered in the annual disclosure statement that {Plan Provider Name} is required by law to provide this August.

However, the fees are still hidden. It would be great if {Plan Provider Name} could provide a report that itemizes the fees and shows the dollars subtracted from my account due to which fees. Instead, {Plan Provider Name} deducts it from the gains and shows the reduced gain. This doesn’t enable you to easily make investment decisions. For example, is a particular fund just not performing well or have all the gains been gobbled up in fees? I asked Dan and several people at {Plan Provider Name} for this, but they say that this report is not available. {Plan Provider Name} has the data points:

-- The return % (from the investment performance chart on the website)

-- The expense % (from the investment performance chart on the website)

-- My account (the dollars I have in each particular fund)

So from a Business Intelligence analyst perspective, it’s possible to create the report. Maybe {Plan Provider Name} should hire {Employer Name}’s BI services : )

I suspect it’s more of a {Plan Provider Name} policy decision. If the law doesn’t require them to disclose all their fees in easy report…why should they? Some 401k Service Providers are more transparent, such as BB&T and Great-West.

In order to change, we need plan administrators like you, to pressure {Plan Provider Name} for more transparent reporting within the next three months.

Thanks very much for your help.

3 likes | 
Flag |  Jul 25, 2013 near Seattle, WA
George Cones, JD

Margaret, You are doing your homework, if more participants did we would not have a problem. Most plans, could have great low-cost choices(25 or more) and all-in expenses (including custody, record keeping, advisor, and internal fund expenses (which is what you are showing us) for at or near 1%. That's all included. Good Luck.

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Flag |  Jul 25, 2013 near Wilmington, DE
margaret

Yes, I definitely had to do some digging. This "markup" was really hidden. I had to look up the ticker symbol, then look up the expense ratios, and enter them on a spreadsheet to make the comparisons. I noticed the higher-cost actively managed funds have a lower "markup". It's more like .2 or .4% But the lower-cost passively managed funds have a .75% "markup". So that when the naïve investor looks at the fund chart....they think they're getting a good deal. They think...wow this Vanguard Fund (with .92% expense ratio) looks better than this Janus Fund (with the 1.35% ratio).....but they don't know that they've given the middlemen .75% of their assets---each year.

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Flag |  Jul 25, 2013 near Seattle, WA

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3 votes
George Cones, JD Level 20

There are fiduciaries for your plan, called plan trustees. Usually these are partners or upper management. They have a duty to be sure that the plan's expenses and fees are reasonable. It would be a good idea to let them know of your concerns, in writing.

Comment   |  Flag   |  Jul 25, 2013 from Wilmington, DE

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3 votes

Margaret, as you already know, those fees are high. If your employer has a reasonably small plan, sometimes the administrative fees need to be high until the plan can grow in both assets and average account balance. Without knowing everything, it really seems like it could be more competitive.

It sounds like your employer puts its employees on projects or some sort of per diem work, yet still offer a 401(k) benefit. And though the fees turn out to be unsatisfactorily high, argumentatively, with the type of staff they are trying to support, it may be the best plan they can come up with. It doesn’t make it great, but if they are giving you a match, it may overall a good deal for you.
If they are not giving you a match, you can contribute up to $6500 into an individual IRA and have more control over fees.

Even though you have not worked this month, are still considered an employee? If you are not, then you can transfer your account to a ‘rollover IRA’, and this moment in time may be ideal. But if you are, especially if you are getting a match, it may not be wise to give up seniority plus a match because of 1% in fees. I don’t know your personal situation.

Comment   |  Flag   |  Jul 30, 2013 from Delray Beach, FL

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2 votes

Margaret,

To exit the plan while you are still employed your plan must allow an in-service distribution. To qualify you typically have to be over age 59.5. Your Summary Plan Description will describe this feature if it is in place.

Your understanding of avoiding withholding is generally correct. If you transfer to an IRA or another qualified plan, taxes and penalties are not a problem.

Yes, the law allows/requires the plan sponsor within certain guidelines to restrict access to your funds.

Good luck.

Comment   |  Flag   |  Jul 25, 2013 from Kingsport, TN

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2 votes
Rich Winer Level 20

Margaret, I would add that some plans will allow you to hold your account at a brokerage firm of your choice or theirs and invest in whatever you like. This is different from an in-service distribution and if the plan allows you to do this, then all employees must have the same option. Most plans probably do not have this option, most likely because the plan sponsors have a fiduciary liability. It is actually true to that many companies will not take a smaller plan or will charge more for smaller plans as a percentage of assets. Also, some of the fees go for educational materials and services and possibly administration services. Most plans pass a lot of these cost on to the plan participants. I would be interested in knowing the name of the plan provider. John Hancock is far from the cheapest plan provider out there, but they have a great selection of mutual funds and provide good educational and other services to help employers fulfill their fiduciary obligations. Some employers are comfortable with a cheaper, more bare-bones plan while others appreciate the additional benefits JH provides.

I noticed that you are no longer working for the plan sponsor. If that's the case, then there should be nothing keeping you from rolling your assets into an IRA. If that's not the case, then you might inquire about adding a brokerage option to the plan or focus your attention on selecting the best, most appropriate options in your plan. At least your company offers you a retirement plan, many do not.

Comment   |  Flag   |  Jul 25, 2013 from Woodland Hills, CA

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