It probably would not take much to convince you that the menu of mutual fund options in your company 401(k) retirement plan is not the greatest.
More and more Minnesota companies are adding the self-directed brokerage option (SDBA) to the company retirement plan menu. A SDBA company retirement plan account option gives you the ability to move part or all of your company retirement plan account off the main menu of mutual fund options to a brokerage account in your company 401(k) retirement plan.
In a SDBA account, you can invest your company 401(k) retirement plan money in an expanded menu of mutual funds. Some companies even allow their company 401(k) retirement plan SDBA accounts to invest in listed stocks and exchanged-traded funds (ETF’s).
Don’t worry if your company 401(k) retirement plan does not yet offer the SDBA option. There is another way to “self-direct” away from the default mutual funds in the main menu.
Federal ERISA (Employee Retirement Income Security Act) law permits tax-free distributions from a company 401(k) retirement plan account. To find out if your company 401(k) retirement plan permits an “in-service” distribution, get a copy of the document called the Summary Plan Description.
To qualify for an “in-service” distribution, you have to be of a certain age listed in the Summary Plan Description. Most age guidelines for a qualified distribution from a company 401(k) retirement plan begin at age 59 ½.
The “in-service” distribution option allows a company 401(k) retirement plan participant who has reached qualifying age to move their entire account balance out of the company 401(k) retirement plan. That money would usually be moved into a self-directed IRA account.
A self-directed IRA is the same place that most company 401(k) retirement plan participants move their company 401(k) retirement plan money to after they retire. Think of an “in-service” distribution as the same thing as a self-directed IRA.
With the “in-service” distribution, you can take advantage of self-directing your company 401(k) retirement plan account at a much younger age.
There is no tax-penalty when you take advantage of an “in-service” distribution. This strategy is also available for company retirement plan participants in government and not-for-profit savings plans like 457(b) and 403(b) retirement plans.
The biggest reason to take advantage of the “in-service” distribution is to get out of the poor mutual fund options in the company main 401(k) retirement plan menu. The other big advantage is much lower fees associated with the investment options in a self-directed retirement plan account than in the mutual funds in a company 401(k) retirement plan menu.
Ric Lager
Lager & Company, Inc.
