Brokerage firms and plan administrators have done a good job of keeping secret from small businesses the ability to withdrawal or transfer certain 401(k) money while still working. In fact, when asked about withdrawing money from employer-sponsored defined contributions plans – even ones where in fact the employer doesn’t match or make profit-sharing contributions – brokerage firms and administrators have reported that withdrawals aren’t permitted ahead of retirement. How to get an ERISA bond for 401k plan It is completely inexcusable that the brokers and administrators have not volunteered the info that a simple, no-hassle, cost-free change in an idea permits in-service withdrawals and transfers.
Any money rolled into an idea from another qualified plan may be withdrawn or transferred without restriction by the employee. Yet, the investment managers and administrators need a mountain of paperwork and refuse to cooperate with employees wishing to take advantage of this privilege. They delay and hassle employees until many quit in disgust. For the time being high fees, risky choices and zero advice is provided. The us 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ERISA provides that matching contributions and profit-sharing supplied by employers may be withdrawn or transferred at any age by employees while still working and participating in the program BUT they allow employers to stipulate an age should they desire. On the advice of the brokerage firms and administrators, most smaller businesses have stipulated that normal retirement age must be reached before such withdrawal are allowed. The prohibition on withdrawals is only 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 uninformed with this ERISA in-service withdrawal provision and those charging the fees aren’t going to volunteer the information. For the time being, employee participants, particularly those nearing retirement, are taking unsuitable risks, paying high fees, choosing from limited options and getting zero investment advice.
ERISA doesn’t allow voluntarily employee contributions to be withdrawn from 401(k) plans while continuing to work at the employer until age 59½ is reached.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 unaware of 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 most 401(k) plans for small businesses. The firms managing the amount of money harass employees who want 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 mainly because money managers value their fees a lot more than the most effective interest of their clients. It is shameful that the regulators sit on their hands and condone such behavior – yet they do.
Small company owners and their staff must rise up and take matters into their own hands. They employ the program administrators and can fire them – the same does work for the brokerage firms that manage the amount of money entrusted to them. To protect themselves and their staff, business owners must add the in-service withdrawal provision authorized by ERISA and they must insist that brokers and administers cooperate in assisting concerned employees withdraw or transfer their money to more suitable options. The in-service withdrawal provision may be added at the direction of the employer at no cost and without delay by simply 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 make this change for their 401(k) plan.