Despite the current trauma associated with all financial markets, most boomers still harbor an aspiration to retire on-time and in good financial shape. However, since October 2007, as mentioned in this retirement blog, they’ve witnessed a decline of almost 23% in the value of their 401(k) plans and are frightened at the prospect of further losses. Confidence in their investment providers is at an all-time low and they’re looking for new ways to protect their retirement savings.

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 the employer does not match or make profit-sharing contributions – brokerage firms and administrators have reported that withdrawals are not permitted prior to retirement. It is absolutely inexcusable that the brokers and administrators have not volunteered the information that a simple, no-hassle, cost-free change in a plan permits in-service withdrawals and transfers.

Any money rolled into a plan from another qualified plan can be withdrawn or transferred without restriction by the employee. Yet, the investment managers and administrators require a mountain of paperwork and refuse to cooperate with employees wishing to take advantage of this privilege. They delay and hassle employees until many give up in disgust. In the meantime high fees, risky choices and zero advice is provided. The 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ERISA provides that matching contributions and profit-sharing provided by employers can be withdrawn or transferred at any age by employees while still working and participating in the plan BUT they allow employers to stipulate an age if they desire.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 best interest of the brokerage firms because they charge fees based on the amount of money in the 401(k) plan. Naturally the small business owner is not aware of this ERISA in-service withdrawal provision and those charging the fees are not about to volunteer the information. In the meantime, employee participants, especially those nearing retirement, are taking unsuitable risks, paying high fees, choosing from very limited options and getting zero investment advice.

ERISA does not 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 best interest of employees is not being served. The 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 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 simply because money managers value their fees more than the best interest of their clients. It is shameful that the regulators sit on their hands and condone such behavior – yet they do.

Small business owners and their employees must rise up and take matters into their own hands. They employ the plan administrators and can fire them – the same is true for the brokerage firms that manage the money entrusted to them. To protect themselves and their employees, business owners must add the in-service withdrawal provision authorized by ERISA and they must insist that brokers and administers cooperate in helping concerned employees withdraw or transfer their money to more suitable options. The in-service withdrawal provision can be added at the direction of the employer at no cost and without delay by simply informing the third party administrator to change 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 to their 401(k) plan.

Shelby J. Smith, Ph.D.