Despite the present trauma associated with all financial markets, most boomers still harbor an aspiration to retire on-time and in good financial shape. However, since October 2007 they’ve witnessed a decline of almost 23% in the value of their 401(k) plans and are frightened at the prospect of further losses. Confidence within their investment providers is at an all-time low and they’re trying to find new ways to guard their retirement savings.
Brokerage firms and plan administrators have done a good job of keeping secret from small businesses the capability to withdrawal or transfer certain 401(k) money while still working. Actually, when asked about withdrawing money from employer-sponsored defined contributions plans – even ones where in actuality the employer does not match or make profit-sharing contributions – brokerage firms and administrators have reported that withdrawals are not permitted ahead of retirement. How to get an ERISA bond for 401k plan It is totally inexcusable that the brokers and administrators haven’t volunteered the information that a simple, no-hassle, cost-free change in an agenda permits in-service withdrawals and transfers.
Any money rolled into an agenda from another qualified plan may be withdrawn or transferred without restriction by the employee. Yet, the investment managers and administrators demand a mountain of paperwork and won’t cooperate with employees wishing to make the most of this privilege. They delay and hassle employees until many give up in disgust. Meanwhile high fees, risky choices and zero advice is provided. The government regulators and FINRA (the self-regulatory organization governing brokerage firms) turns a blind eye toward these abuses.
ERISA provides that matching contributions and profit-sharing supplied by employers may be withdrawn or transferred at any age by employees while still working and participating in the program BUT they allow employers to stipulate an age when they desire. On the advice of the brokerage firms and administrators, most smaller businesses have stipulated that normal retirement should be reached before such withdrawal are allowed. The prohibition on withdrawals is in the most effective interest of the brokerage firms since they charge fees based on the sum of money in the 401(k) plan. Naturally the small business owner is unaware of this ERISA in-service withdrawal provision and those charging the fees are not going to volunteer the information. Meanwhile, employee participants, particularly those nearing retirement, are taking unsuitable risks, paying high fees, choosing from very limited options and getting zero investment advice.
ERISA does not allow voluntarily employee contributions to be withdrawn from 401(k) plans while continuing to work at the employer until age 59½ is reached. However, the employer is permitted to stipulate an older age which most have done on the advice of the broker and administrator. Again, hard-working employees and employers are unacquainted with this more liberal withdrawal option permitted by ERISA. Employers are taking undue risk as trustees and fiduciaries of the 401(k) plan because the most effective interest of employees isn’t being served. The end result is more risk, higher fees, fewer options and endangered retirements.
The greed of Wall Street is alive and well in many 401(k) plans for small businesses. The firms managing the money harass employees who would like to transfer their money with extra paperwork, delaying tactics, misinformation and outright untruths. The ability to make in-service, non-hardship withdrawals is absent most plans of small businesses simply because money managers value their fees significantly more than the most effective interest of their clients. It’s shameful that the regulators sit on the hands and condone such behavior – yet they do.
Business owners and their staff must rise up and take matters into their own hands. They employ the program administrators and can fire them – the exact same is true for the brokerage firms that manage the money entrusted to them. To safeguard themselves and their staff, business owners must add the in-service withdrawal provision authorized by ERISA and they should insist that brokers and administers cooperate in helping concerned employees withdraw or transfer their money to more desirable options. The in-service withdrawal provision may be added at the direction of the employer at no cost and without delay by informing the alternative party administrator to improve the prototype plan. To do otherwise is irresponsible and exposes the employer to undue liability as a trustee and fiduciary. Employees should absolutely insist in writing that employers get this change for their 401(k) plan.