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Smart Investing Newsletter Archive

Investors must keep on top of their 401(k) options

January 21st, 2014

Many investors have a good portion of their investments in their 401(k), which could be a good idea.

But there are two problems that I have seen over the years. One is that the investment options the employer has given you are not very good. If you're stuck with bad investment options, it probably still makes sense to add to your 401(k) for the tax deduction and if your employer has a matching program, one needs to find a way to put into that program and benefit from the employer match.

Some of these employer matches are 50 percent of what you put in, up to a limit. If the bank around the corner said for every dollar you give us, we will add to your account 25 or 50 cents, there would be a line around the block.

Unfortunately, the same is not true when an employer offers to match an employee's contribution with the same 25 to 50 cents on the dollar. Maybe people don't understand how great a benefit this is; maybe they are not aware of it; or maybe they think it is foolish to lock up money for so long.

Whatever the reason, they are missing a great benefit from their employer and they should re-examine why they are not taking advantage of it.

The second reason is that many people don't know how to invest their 401(k) money. They don't have anyone they can turn to for investment advice because the company responsible for the investment portion of the plan generally wants to collect the fees off your contributions. If you're lucky, you'll get sent to an information website.

The sad part is that many people end up doing nothing, keeping the money in a money market account and earning returns of 1 percent or less.

Employees who are 50 or older may have the option to roll a good portion of their funds out of the 401(k) plan to an IRA rollover. This is what is known as an in-service distribution, which isn't well known. While the law allows this, administrators don't have to allow it. The 401(k) administrators who allow it may not let you know about it. However, 70 percent of companies do allow it, and for companies with 5,000 employees or more, that number jumps to 89 percent.

There are many details to this, but the big one that people ask is: If I do the in-service distribution, am I closing my current 401(k) plan?

The general answer is no, you can still and should still continue to contribute to your 401K plan. It should be pointed out that the money must be rolled over to a qualified plan.

It is important to remember that this is your retirement money and much thought should be placed in where one rolls that money. There are many insurance salesmen and brokers who would love to make a big commission on your money. You may have been better off just leaving it where it is, if that is the case.

You may wonder, why this is allowed. I believe it was due to such things as the people who had their 401(k) money in companies like Enron and went broke. Many people lost not only their job but also their retirement. The in-service distribution allows employees to have more options and more control of their retirement plans.

So, while I think the in-service distribution is a great option for many, there are many things to consider and only after discussing with a qualified professional all the pros and cons should one make the move.

Do you have a question or a company you'd like me to take a look at? Email me at