Take Control of your Retirement Assets with an In-Service Distribution

By David J. Seibel

The recent turmoil in the financial markets has made us aware that we need to have the ability to manage and protect our retirement assets better than we are currently doing. Many of us have seen our retirement savings experience a roller coaster of returns since 2000, leaving balances pretty much where they were back then and the only growth being the additional contributions we have made. For those that are nearing retirement, ready to retire, or past the point that they wanted to retire, the loss of market value of these accounts have left many with no other option than to continue working.

An employer-sponsored contribution plan such as a 401(k) is still, in most cases, the best retirement savings option for most Americans. This is especially true if your company matches all or a portion of the employee contribution. Some plans will contribute a percentage of the employee’s salary regardless of whether the employee makes contributions. It’s like getting free money, and who doesn’t like that!

Employee contributions are deducted on a pre-tax basis and growth is tax deferred allowing (in theory) your account to grow faster. Many plans oer a wide array of mutual funds as investment choices that allow the plan participant to diversify their account.

Note: There are potential long-term pitfalls to tax deferral that most people are unaware of. Please consult your financial advisor and tax professional. This will be the subject of a future article.

For many employees that have been with the same company for many years or those that rolled a 401(k)
from a previous job(s) into their current plan, their retirement plan balance can represent a significant sum of money. In many cases this may be most or all of their retirement savings. With the implosion of the housing market, a 401(k), in many cases, represents a person’s single largest asset. With regular contributions, a person in his or her forties or fifties could easily have an account balance in the hundreds of thousands of dollars. While this all sounds nice there are a few problems and risks with keeping all your eggs in the company’s retirement basket.

Many plan participants never talk to a financial professional. While most companies give the employees the opportunities to talk to an advisor from the plan, most seldom or never do. In most plans you are sent an enrollment package when you are entitled to join the plan and from there you pick your deduction amount and investments. Sound familiar?

How many employees in a company are really qualified to make this decision? Many simply rely on the advice of family, friends, or coworkers who simply quote the “conventional wisdom.” Is it fair to ask any employee to read a prospectus and perhaps scour the website (or worse yet the financial gurus) for information in order to make one of the most important long-term financial decisions they will ever make?

While most people will look at their retirement plan statements, how many know what to do? Ok, I have this balance (hopefully a big one!) but what’s the plan? What is the best asset allocation, what about re-balancing or reallocation, what about risk, what do you do if the market implodes? We’ve all heard the joke, “My 401(k) is now a 201(k)!” Being in “the same boat” with everyone else is small comfort if you are getting ready to retire. You need a plan!

Some company retirement plans just aren’t that good! What do you do if you have your hard-earned dollars
in a retirement plan that regularly underperforms? Stop contributing? Perhaps, but this doesn’t help the
assets that are already in the plan and missing out on the company match is probably not the smartest
thing. You can hope that at some point the executives at your company decide to make a plan change. This
is not a quick process. Most companies today are faced with many more pressing issues.

Many plans offer limited investment choices. While many plans offer a full menu of mutual funds there are primarily three investments; stocks, bonds, and cash. We all were taught to think that a reasonable allocation among those three was enough to provide diversification in your portfolio. The market upheaval of 2008 and 2009 taught us that the theoretical financial speak that we were all told was the gospel may not actually work under all market conditions. Really? The fact is that, for most, they exercise very little control over their largest asset.

Now how about some good news…..

What would come as a surprise to many is that you may not need to keep all your assets in your company’s
retirement program. Through a process known as an “in-service distribution” (ISD) many companies allow
participants to roll funds in the plan into an individual retirement account (IRA) while still employed. The benefits of this type of distribution include:

• The ability to work with a financial advisor of your choice to develop a long-term financial plan for your retirement taking into account all your assets.
• True diversification by being able to invest in assets other than just those offered by the company plan.
• The ability to protect your asset value while creating a personal pension for retirement income.
• More control over your assets and your retirement plan.
• And much more!

Like most things in life there are also potential disadvantages of an ISD. You should consult a financial advisor and tax professional and understand the short and long-term pros and cons of an ISD before any transfer is made.

Many, but not all, companies offer ISDs. Refer to your plan document, which is available from your HR
department or online, to see if your company offers ISDs and what they consist of. Be aware that many of the HR people I have spoken to are unaware that this option exists and are quick to tell you it is unavailable even when it may be. Read your plan document or have it reviewed by a financial advisor. Every plan is different. If ISDs are offered they could be available for just your contributions, the company’s contributions, or both. There may be limits on amounts and/or years of service.

If you determine that you are eligible for an ISD review your situation with your financial advisor and a tax specialist. If an ISD makes sense for you it may be the best way to take control of your financial future and provide true financial security for your retirement.

David J. Seibel is founder and Managing Partner of AGS Aurora Financial Services, LLC, an independent financial advisory firm in Matawan, New Jersey.