There are many reasons you should consider funding your employer sponsored retirement plans.
In fact, when prioritizing which retirement account you should fund, your top priority should be funding your 401(k) or 403(b) sufficiently to get an employer match. Contributing 5% of your salary and receiving a match of 4% of your salary is the quickest way of earning an 80% return.
Not all employer plans offer a Roth deferral, but when they do, you should normally take advantage of it. Roth contributions are included in income but avoid all future taxes. Traditional contributions are excluded from income but will face taxes when you withdraw the larger appreciated amount in retirement. A Roth contribution is generally preferable.
However, even though you would likely benefit from contributing to your 401(k), you might not benefit from keeping your assets there — even if you are the owner.
Here are four reasons you may want to get out.
1. You plan is bad and you can get a new one.
401(k) plans are notorious for being costly. They are burdened with record keeping and compliance expenses, which are often but not always paid by the participants.
On top of that, most retirement management companies are merely salesmen who install expensive funds that pay the broker who installed the plan more than they help the participants. Sadly, the highest costs usually hit the smallest companies.
If your 401(k) plan is costly and poorly run, you should consider calling us to get a free proposal either for a new plan or to replace your existing one.
We believe that every business should start a 401(k) and every non-profit should offer a 403(b). The potential tax savings for employees is tremendous. But every business owner or director of a non-profit should realize that if they don’t take their fiduciary responsibility seriously, they are legally liable for their neglect and inaction. For example, Ameriprise was sued by its employees over excessive 401(k) fees, and they had to pay $27.5 million to settle.
The highest form of fiduciary support comes from advisers that accept 3(38) status. A 3(38) investment manager supports the plan by choosing all of its investment options. Typically, a 3(38) adviser also creates the models or fund of funds being used to make diversification easy for plan participants.
Our firm decided to become a 3(38) investment manager because playing this role offers our clients administrative relief. By taking on the role of a 3(38) adviser, we accept responsibility for selecting a prudent investment strategy. Advisers who do not name themselves 3(38) investment managers must seek the approval of an organizational investment committee every time an investment allocation needs to be adjusted or replaced. Thus, it’s nearly impossible to maintain a fiduciary relationship and a dynamic investment approach without hiring a 3(38) investment manager.
The retirement plans we offer have always included low cost mutual funds as well as model portfolios using those low cost mutual funds. Each of these model portfolios are designed with a specific mix of stocks and bonds. The portfolios range from 100% stocks for younger clients to portfolios which gradually add bonds into the mix for participants who are about to take withdrawals in retirement. We believe that these funds and the portfolios built from them have lower costs than the typical fee-laden retirement plan offerings from many other financial companies. As a result of the lower costs, we think they will also have a better return.
In 2017, we also added an age-appropriate unitized trust option for our retirement plans as the latest enhancement. In addition to other valuable benefits, our unitized trusts allow us to implement our dynamic tilt based on forward P/E ratios, which studies suggest may generate a higher expected mean return.
We first designed our “dream” retirement plan when a client who was a small business owner asked us to review the 401(k) plan proposals that he was being offered. They were all terrible and laden with fees. On further analysis, we concluded that most retirement plan proposals were similarly terrible and laden with fees. So we designed our own.
Now, we offer retirement plans not just to our client business owners but to any organization that wants professional management from a fee-only fiduciary like us.
Whenever a company offers a 401(k) or a non-profit offers a 403(b) plan, they have a fiduciary responsibility to provide a quality low-cost retirement plan as well as a responsibility to perform periodic reviews to ensure that the plan is the best it can be for participants. Failure to perform high quality or periodic reviews is a litigable fiduciary breach.
You can learn more about our employer plan offers at our Retirement Plan Management service page. If your organization would like a proposal either for a new plan or to replace your existing one, please just give us a call. You and your plan participants deserve a fiduciary standard of care for your retirement plan assets.
2. Your plan is bad and you can bail.
If you are not the plan owner, although you can solicit a 401(k) review from a company like ours, ultimately it is not within your power to make the switch to new management. If your employer will not recognize how bad your new plan is, your only options are to sue or to bail.
Even if your plan is bad, it is likely still in your best interest to contribute enough to get your employer match. Contributing 5% of your salary and receiving a match of 4% of your salary is the quickest way of earning an 80% return. Even if their are high fees, the 80% return is likely worth more than the fees cost. Also, if your plan offers a Roth option, it could be of great value to save more of your assets from future taxation by contributing to the Roth side, even if the fees are high or the fund choices are poor.
However, just because you contribute doesn’t mean you have to keep the funds there!
If you are “in service,” meaning you are still employed, some components of your plan might be trapped, but many employer plans allow the Profit Sharing portion of the plan to be rolled out even while employed. Furthermore, if you are older than 59 1/2, the IRS rules allow you to roll out your employer plan funds even if you are still in service.
If you are “out of service,” meaning after your termination or retirement date with the firm, you are allowed to perform an IRA Rollover to extricate your assets out of your employer’s plan and into an Individual Retirement Account (IRA) at a custodian of your choosing.
When performed correctly, simply moving the assets out of your employer plan and into the proper IRA is not a taxable event. However, you have to make sure you do it properly. We have a guide on how to do that here: “How to Rollover Your 401(k) into a Schwab Institutional Intelligent Portfolio with Marotta Wealth Management.”
3. You are a 5% owner of the sponsored plan approaching age 70 1/2.
or 4. You are retired or terminated.
After you reach the age of 70 1/2, the IRS requires you to begin taking minimum distributions from your traditional retirement accounts called a Required Minimum Distribution (RMD). Individual Retirement Accounts (IRAs) such as Traditional IRAs, SEP IRAs, and SIMPLE IRAs are all subject to required minimum distributions (RMDs) in the year you will reach age 70 1/2.
Roth IRAs are not subject to RMDs.
If you do not own the company, employer sponsored plans like 401(k), 403(b), and 457 plans are only subject to RMDs in the year you both reach age 70 1/2 and are terminated from your employment with the sponsoring employer.
However, if you are more than a 5% owner of the company that sponsors the plan, then you must start RMDs in the year you reach age 70 1/2 regardless of whether you are still employed.
Anyone who has to take RMDs from their employer sponsored retirement plan, sadly, has to take RMDs from all components of the plan. This includes traditional employee deferrals, profit sharing, employer match, and even Roth deferrals!
As the IRS FAQs say, “The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive.”
For this reason, if you are younger than 70 this year and either retired, terminated, or a 5% owner, you would likely benefit from doing an IRA rollover very soon in order to protect your Roth assets from the coming RMDs. If you are older than 59 1/2, the IRS rules allow you to roll out your employer plan funds even if you are still in service. We have a guide on how to do that here: “How to Rollover Your 401(k) into a Schwab Institutional Intelligent Portfolio with Marotta Wealth Management.”
In addition to escaping the RMDs on your Roth assets, performing a rollover opens yourself up to being able to perform Roth Conversions, frees yourself from the employer plan’s fees, and allows you to craft your own investment plan.
Required minimum distributions are always costly to your potential net worth. However, RMDs on Roth accounts are particularly costly as you both lose any additional tax-free growth and subject the distribution’s dividends and interest to annual taxation.
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