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401k In-Service Rollover

401k In-Service Rollover

February 17, 2024

It is estimated that 60 million Americans participate in 401k plans1. That’s about half the number of Americans that watched the Super Bowl this year, but it is not insignificant. As many companies over the years have abandoned the pension plan for their employees, retirees have become reliant on the 401k to help supplement their social security income. Aside from the potential tax benefits of contributing, the main benefit is the employer match on contributions. If you have any retirement plan that offers a match, it is a good idea to max it out. After you have hit the max for matching, you will want to talk to your advisor to see what other options make sense for your particular situation. Now for the drawbacks of the 401k plan:

Plan Fees

Typical 401k plan fees can range anywhere from 0.5% to 2.0%2. These costs can include administrative, custodial, individual service, and investment fees including 12b-1 fee. Many Americans do not even realize they are paying fees on their 401k plan as shown in a TD Ameritrade study that estimates only 27% of investors knew how much they were paying in fees. Although the largest corporate plans fees may be much lower than the typical plan, participation does come with a cost.



Investment Options

As industry backlash over exuberant and hidden fees in 401k plans has created more transparency, it has not come without a cost. Investment options may be extremely limited in plans where employers have sought to bring down the plan fees passed on to their employees. Many plans today only offer target date retirement funds or a handful of individual fund options. Even if your plan fees before expense ratios were close to zero, you are essentially paying for nothing but the ability to get a match from your employer.

It’s not all bad news though. Many people choose to rollover their 401k into an IRA (Individual Retirement Account) when they retire. But did you know that most plans allow you to do an in-service rollover when you turn 59.5, while still contributing to the 401k plan. If you are in a plan with limited investment options, that is great news because with an IRA you have more investment options. And if you are not sure how to allocate your portfolio, working with an advisor may not cost much more than your current plan.


At Legacy Finance, we take pride in being able to help you make the right allocation decisions. Doing an in-service rollover can provide a significant benefit for our clients when included with a financial plan. Through our financial planning we provide a risk assessment, retirement income analysis, as well as tax and estate planning, to make sure that your retirement portfolio fits with your desired goals. If you have not done so already, please reach out to us to learn more.

 

1401(k) Plan Research: FAQs | Investment Company Institute (ici.org)

 

2401(k) Fees: Everything You Need to Know (investopedia.com)