Perhaps the first lesson I learned
as an In-Plan Specialist (read: 401k Account Specialist) at an investment firm
some years ago is that these employer-sponsored retirement savings plans are
not created equal. Far from it.
There were the obvious
differences, such as how much of the employees’ contributions the employer
would match or how long it took to become vested in the employer contributions. But beyond that there were differences in
whether the plans allowed loans to be taken from the accounts; which categories
of employees could participate in the plan; how many loans were allowed;
whether they accepted transfers of funds from an employee’s previous employer’s
401(k); whether withdrawals could be made for non-emergency needs, and how
much. It was amazing to read through the
plan documents and see the range of differences. In fact, the documents were so long and
complex that it was not a rarity for us representatives to field questions from
a caller and, while under pressure to resolve matters quickly and get to the
next caller, misinform the caller due to missing some detail while we hurriedly
scanned the plan paperwork.
There is a key takeaway from this
for owners of 401(k) accounts. You
probably want to double-check what the rep from the account custodian or your
human resources department tells you about your 401(k) plan. You can best accomplish this by obtaining a
copy of the plan documents for yourself.
I recommend that because reading through it—boring as it may be—can raise
questions you never thought to ask.
One such question is “how are
withdrawals made?” You might assume that
you can designate the mutual fund (and it’s not unusual to have several within
your 401k: stocks, bonds, cash) from which you want the funds withdrawn. Or you might think you can simply ask the
funds be withdrawn proportionately from the various mutual funds in your
account. But neither may be true for
your 401(k). One unlucky former employee
of the Wall Street Journal requested a pro rata partial distribution
from his account. What happened instead
was that all the money was withdrawn from the most conservative fund in his
account. So while he probably owned some
stock funds and bond funds, the custodian (Fidelity) took all the money from
something like a money market cash account.
Do not blame Fidelity, at least
not wholly. The employer is largely
responsible for setting the rules of the company 401(k) plan. And I would venture to guess that their
intent with this rule of withdrawing first from the most conservative fund was
to keep people aggressively invested for growth so they will have a higher
balance at retirement. But suppose the employee
is already retired and wants to reduce his portfolio risk profile by cashing in
some of the riskier stock funds he owns?
Too bad. He would first have to
sell some of the stocks within the account to transfer the proceeds to the
money market fund and then make his withdrawal.
But unless he knew that beforehand, he would be blindsided by this rule.
So make a note to yourself to
request your 401(k) plan documents from HR.
There may not be any surprises there, but it’s best to be sure.
Until next time,
Roger
“When the king heard the words of the Book of the Law, he
tore his robes. He gave these orders….Go
and inquire of the LORD for me and for the people…about what is written in this
book that has been found.” 2 Kings 22:11-13 NIV*
*Scripture
quotations taken from the Holy Bible, New International Version® NIV® Copyright
© 1973, 1978, 1984, 2011 by Biblica,
Inc.™ Used by permission. All rights reserved worldwide.
