In-Service 401(k) Transfers: Are They Right for You?

By: Paul Coleman

One of the questions I get most often from my retirement planning clients is can I rollover my 401(k) while I'm still working for my current employer. This is usually asked because the client has lost a significant amount of money in their 401(k), and their options for safety may be very limited. Frustration sets in because their HR departments can't advise them, and the plan providers often flip to the "stay the course" speech.

The short answer is it depends on several factors. Read on....

What is an In-Service 401(k) Transfer?

An in-service transfer is a rollover of some or all of your funds from your current employer's 401(k) to an IRA. Most of us are familiar with rollovers following a job change where the funds are rolled to an IRA or into the new employers 401(k). This is different because this type of rollover occurs while you are still working for the company sponsoring your 401(k).

So How Does It Work?

In-Service transfers work just like normal rollovers, but they are governed by the plan documents between your employer and the plan provider. We recommend that employees obtain a copy of their employer's Summary Plan Description (SPD) and look for guidance or rules governing in-service transfers. Not all plans allow for this provision, but the majority do when an employee reaches certain triggering events such as age, disability status, or plan termination. For example, a common restriction may be that transfers are prohibited before age 59 1/2.

There are two basic types of rollovers: Direct and Indirect. With direct rollovers, your plan provider transfers the money directly into your IRA thereby avoiding any taxes or penalties. With an indirect transfer, the funds are released directly to you and the funds must be deposited into a new IRA within 60 days. Failure to meet the 60-day requirement will result in taxes and possible penalties for early withdrawal. For this reason, we normally recommend a direct rollover.

How Can an In-Service Transfer Benefit Me?

There are pros and cons to consider with any major financial decision so let's take a look.

Benefits of an In-Service 401(k) Transfer

1. More Control - When your funds are held in a company sponsored 401(k) you are subject to the provisions of the contract between your employer and the plan provider. Once the funds are moved to an IRA, you gain much greater control over how the funds are invested and how the plan is managed. This may be critically important for those who are getting closer to retirement and are focused on preserving their retirement assets rather than risking them in the market.
2. More Investment Options - IRA's typically offer a wider variety of investment options than 401(k)'s. This allows the owner more opportunity to meet their investment goals, especially if safety of principal is a key concern.
3. Potential for Lower Fees - With a 401(k), you are subject to the fee arrangement agreed upon between the employer and the plan provider. You have no say in the matter as a plan participant. With an IRA, you can shop fees and there are also no-fee products available in certain cases.

Drawbacks of an In-Service 401(k) Transfer

1. No Options for Loans - Once funds have been moved from a 401(k) plan to an IRA, loans are no longer allowed. For this reason, some will consider a partial transfer to retain some flexibility.
2. Restrictions on 401(k) Participation - In some cases, an employee may be restricted from participating in the 401(k) plan for a period of time following an in-service transfer. This should be part of your consideration when reviewing the Summary Plan Description, especially if matching funds are part of the equation.
3. No Withdrawals at Age 55 - If you turn 55 during the calendar year that you lose or leave your job, you can begin taking distributions from your 401(k) without penalties for early withdrawal. This provision does not exist with IRA's.

Bottom Line

One of the most important considerations we all face in managing our retirement savings is how we manage risk. As we approach the later stages of our careers, its critically important to scale back the level of risk associated with our retirement savings plans. The reason is two-fold: We should have more money on the line than ever before at this point and we have less time to make up for catastrophic losses.

Make no mistake about it, most 401(k)'s are heavily invested in mutual funds and other market-based investments. This means we have no protection on that money and losses of 50% or more can happen with little warning. One only has to look at the financial crisis of 2008 that led to the Great Recession and the Covid Crash of 2020 to see how trillions of dollars can be suddenly wiped out in 401(k)'s and other employer sponsored retirement plans.

Lifetime returns on 401(k)'s are somewhere between 5%-8% which means it would take years to make up major losses late in our careers. When losses of this magnitude do occur late in our career many are either retiring at a much lower standard of living than they had planned for or perhaps they are not retiring at all. So why do so many people risk their entire nest egg for such low returns late in their careers? The simple answer is that most do not know that In-Service Transfers of 401(k)'s even exist.

Our Solution

For many of our clients who qualify for an In-Service Transfer, we take it a step further by rolling their funds to a new IRA paired with an Annuity. With this strategy, they have the benefits of the IRA outlined above. The annuity brings added protection by placing a floor under their money so when markets go down, they don't lose any of their principal balance. When markets go up, they participate in those gains which are locked in annually. It becomes a win-win because we remove the downside risk while capturing the upside of future market gains.

Finally, if you elect to roll some or all of your 401(k) using an In-Service Transfer, it does not mean you can no longer participate in your company plan. While you may face some restrictions as outlined above, you should be able to continue contributing to the plan and enjoying the company match as long as you remain employed. Utilizing this strategy allows you to move those funds out of the Wall Street Casino and save them for their intended purpose: Your Retirement!

Next Steps

If you have specific questions regarding this topic, you can reach us at 804-517-5354. If you would like to learn more about our services, please visit our web site at www.dominiongroupva.com. Scheduling links are available on our website where you can book a free, no obligation call to learn more about your options.