Usually, you cannot roll over your 401(k) plan from your current job unless it allows for “in-service rollovers.” It is always possible to roll over from a company you are considered a terminated employee.
How do 401(k)s usually work when I want to roll over my dollars to my IRA?
Usually, you cannot move your 401k assets until you are terminated, meaning you quit, move jobs, or are fired from the job officially by HR.
Plans with in-service rollovers can easily roll their dollars over to their IRAs or side business Solo 401(k)s and invest them however they wish, all without having to be terminated from employment. Some people find this option very attractive, especially when their retirement plan investment options are not currently meeting their needs.
If you are close to 59 and 1/2, sometimes a plan will allow workers close to this age or all employees above this age to roll out funds to wherever they wish, even when they are still working at the company.
If there are in-service rollovers, you can rollover your own personal contributions, but some matching money may have not yet been vested according to the vesting schedule. If the employer match money has not yet been vested, you cannot withdraw it from the plan. If you leave the company, the vesting usually cuts off all future funds, similar to how a stock vesting motivates employees to stay at the company by the future benefit being cut off after leaving a company.
Why is this a restriction on most plans?
401(k) record-keepers often make money by how much asset charges and more as assets are in the plan. Sometimes business owners or HR want to help the plan by building up plan assets, as this can lower fees for all employees and the business.
This default option is sometimes picked for a plan without the business owner or the HR even knowing about it.
How do I ask for this?
You should ask if your plan allows for in-service rollovers. In-service distributions are generally seen as an irresponsible retirement saving and tax decision, by removing all your traditional pre-tax dollars and paying taxes on them immediately + a 10% early withdrawal. Rolling over to an IRA in the correct manner will keep you safe from any tax penalties from distributions and your longer-term retirement security. If you only ask for in-service distributions and do not mention in-service rollovers, your HR or plan provider will likely shut down the conversation over this confusion.
If you are asking HR or an employee who manages employee benefits...
I would like to see if in-service rollovers are possible through our 401(k) plan, so I can roll over some/all of my 401(k) plan to my own IRA. I don't think the investment options I have been looking for will be available through our current lineup of funds.
If you are talking directly with your 401(k) provider...
I would like to see if in-service rollovers are possible so current employees can roll out their dollars to their own IRAs. Is this in our current plan document and summary plan description, and if not, what would be the steps to amend the plan document to make it so?
My company plan won’t let me do an in-service rollover... is there anything else I can do?
Due to the COVID 19 Pandemic, and the Congressional Stimulus bill and CARES Act, you might be able to take dollars out of a corporate 401(k) and then place them back inside an IRA. Keep in mind if those dollars are NOT returned to an IRA or 401(k) within three years, you can see tax consequences for all those dollars in distribution. Always make this decision carefully and considering talking to your CPA or accountant on what moves could bring you tax implications.
You can read more here.
Will Rocket Dollar’s ability to invest in alternatives come to the corporate 401(k) industry?
We can help companies and small businesses with the SEP-IRA, where each employee sets up their own SEP-IRA with the company of their choosing.
Five employees could open up SEP-IRAs at Rocket Dollar, for example, while the remaining fifteen open ones up at other custodians trading just stocks and bonds.
Self-Directed investing has been possible since ERISA Retirement plans were created in the 1970’s. However, Rocket Dollar entering the corporate plan industry in today’s world is very unlikely.
With the fiduciary standard, the CEO or HR helps out as the trustee of the plan and sometimes as the plan fiduciary. Even if you and some of the other employees are very knowledgeable about alternatives and some plan investments, fiduciaries and plan trustees have an obligation to take care of the investment health of the plan and the employees participating in it. As the IRS lays out, fiduciaries must...
- acting solely in the interest of the participants and their beneficiaries;
- acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
- carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with the matters;
- following the plan documents; and
- diversifying plan investments.
So, for example, letting customers roll their assets out to open an IRA, maybe at Rocket Dollar or the location of their choice, could still be in the best interests of the plan as it is in the interest of participants and their beneficiaries.
Putting in 40 alternative investment choices, some with complex assets and a few very high-risk investments that only five of the twenty employees at the company understand could be a dereliction of fiduciary duty. If two of the other employees lose lots of money from a failure to recognize the funds as high risk, the plan trustee and fiduciary could be seen as liable. They did not choose investments that suited their company or did not educate their employees enough on the risks themselves.
What is a possible solution to keep all the employees happy being a fiduciary?
In closing, Rocket Dollar would be happy to help the five employees open a Self-Directed IRA and let them invest in whatever they wish with checkbook control. The investment options in the plan can still service the other employees. If the corporate 401k allows for in-service distributions, these five employees desiring access to alternatives will be happy. They can put their retirement into the investments they want without having to leave the company.
By not changing the investments for just a small number of the company, the plan fiduciary does not create any risk for the employees who might need extra education to deal with alternative investment options being added to the company 401(k).