7 Reasons to Dump Your 401K After a Layoff Pt 2

Reason #2 to Dump your 401K after the layoff:   COSTS

I’ve probably heard almost all the reasons out there.  These are the excuses dealing with costs:   It’s cheaper to be in the 401K.   I can buy institutional funds.   The funds are monitored and picked for the company.

  • Cost – who pays the cost on a 401?   There are three ways that the costs to maintain a 401K plan are paid:
    • Fully paid by employer (rare)
    • Partially paid by employer and remainder paid by participants
    • Cost spread among all participants in plan (popular).

    Depending on the size of the plan (dollars and number of participants), your cost is going to be much higher inside a 401K plan than to manage it yourself. Keep in mind, if your company has been laying off a lot of workers and they are moving out their 401K balances, the costs for the remaining participants will keep going up as the fixed cost gets spread around to fewer people.

    Photo Credit Robert McCabe
  • Costs to maintain a 401K
    • TPA – Third Party Administrator – They handle the paperwork to track the plan and to process your request, enrollment and distribution
    • Payroll Company – They collect the money from your paycheck and post to your 401K account – This is an extra service that employers have to pay for
    • Custodian – Company holding the funds on your behalf and process sales and purchases.
    • Mutual Fund Company – costs of managing the mutual funds (Large plans may get institutional shares which is cheaper than what you can buy outside unless you have a managed account) – It’s a wash with what you have to pay outside for a mutual fund
    • Plan Advisor – They chose the mutual funds, review mutual funds progress, do quarterly training at site.  Services vary based on companies.  Some advisors only charge the fee but have not seen their clients for a decade.   The worst one I heard of never showed up since opening the plan 15 years earlier.
    • Plan Fiduciary – Some companies don’t want to take the responsibility of being the plan’s fiduciary and pay for an outside service.
    • Bonding – Companies have to maintain a bond for the 401K plan
    • CPA – Certified Public Accountant – Plans with balances over $100,000 have to file a separate tax return. Here is a partial list of other forms that the CPA has to do
      • Form 5500 – Annual Tax Returns
      • Form 945 – Income tax Withheld
      • Form 990 T- Gross unrelated income
      • Form 1099R – Distribution notice
      • Form 5329 – Additional Tax
      • Form 5330 – Report taxes for over contribution, deficiency, reallocation, etc…
    • 401k gives access to institutional funds – No, not always.  It depends on the company and the funds allowed by the custodian.   You have to do the detailed research.  In addition, is the small percentage saved by using an institutional fund offset by all the other costs?  Or are you wasting money.

      So, after knowing all the costs that an employer incurs to maintain your 401K, how much are you willing to subsidize their costs with your retirement money now that you no longer work there?   You can request a booklet by the Department of Labor that gives a checklist of questions to consider.  The choice as always is yours.

© 2010 MoneyandRisk.com

Photo credit Robert McCabe

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