Question: Is it possible to be spread too broadly across mutual funds? I have an IRA account invested in one mutual fund, a 401(k) account from my previous company invested in five funds, and my current 401(k) in another five funds. Is there a disadvantage (other than having to keep up paperwork on several accounts) to maintaining my retirement investments in several places? Should I consider rolling my old 401(k) over to my IRA? By the way, the performance of all the different funds has been satisfactory.

TB: First, let's deal with your question of whether you will be disadvantaged by leaving your money at a former employer. I generally recommend getting money out of a former employer's plan because it can become more difficult to keep in touch as the years go by. People you know leave; the business may be sold; the existing investments may be changed at any time; etc.

Transferring the money into an IRA gives you greater investment choice and control. IRAs, however, aren't as well protected from creditors as 401(k) plans are, which is a major disadvantage. Transferring the money from your old employer's plan into your new 401(k) will give you the same level of protection from creditors and should make it easier to manage, including getting the money out in the future.

The transfer to an IRA or your new 401(k) should be made directly from the old plan (using what is known as a trustee-to-trustee transfer to avoid the mandatory 20 percent tax withholding.

Now let's deal with your question regarding having too many funds. Having your money spread into three separate accounts and 11 funds makes it much more difficult to maintain an appropriate allocation mix. For example, if your goal is to have 20 percent of your assets invested in large-cap stocks, you should look at your mix for all three of these accounts to get a 20 percent allocation into this type of investment. You will also need to review your allocation mix more frequently because one or more is a frozen account; unlike your new 401(k), which has money flowing into it each month.

Another potential problem with this type of arrangement is having an undesirably high concentration in a few stocks or a particular industry. Suppose, for example, four of the funds you are invested in hold major investments in one company. If there is a big downward move in that company's shares, you are exposed to it fourfold. If you roll the old 401(k) money into either the IRA or your current plan, you should be able to create a better portfolio allocation that won't have overlapping investments.

Question: I am a sales professional in the qualified plan industry. More frequently, I'm competing against vendors that say they will be "co-fiduciaries." They will typically charge a fee for that of about 25 basis points of assets or higher. What does a co-fiduciary do that a directed trustee does not? And, a service provider already bears fiduciary liability, so does this co-fiduciary actually reduce the fiduciary liability of the plan sponsor?

TB: You have asked two great questions.

Before I get into the answer, let me define a few terms. First, a fiduciary is a person who has discretionary authority or control over a qualified plan trust, its assets, its administration, or who, for compensation, will provide investment advice regarding plan assets. Employers, known as plan sponsors, are fiduciaries. Plan trustees and advice providers are also fiduciaries. Each one of these players has varying amounts of responsibility to act in the best interest of the plan participants. A 401(k) plan fiduciary's responsibility is defined generally by the Employment Retirement Income Security Act, which is administered by the Department of Labor.

A trustee, or directed trustee as you called it, is the financial institution responsible for holding the assets of a retirement plan. The trustee is responsible for guaranteeing any monies held in a plan, even if the sponsoring employer goes bankrupt.

My answer to your first question is that the co-fiduciary relationship probably doesn't provide any greater liability protection than a directed trustee. The employer has the ultimate liability exposure regardless of the structure. I have always told plan sponsors who are really concerned about the liability exposure associated with a 401(k) that the only way to avoid liability exposure is not to have a plan.

I typically gave this response when I was competing with a sales professional from an organization who would tell the prospect that all he had to do was give this particular organization the check and they would take care of everything. It was implied that this would include all liability exposure. Business owners must, in fact, take risks every day — those that go with overseeing a 401(k) plan are relatively minor in comparison.

It has always been my opinion that any organization handling employee retirement savings is a fiduciary and should act accordingly. My old company operated in this manner even though we did not exercise any investment control.

Many of the major providers use a captive corporate trustee when they are operating in a bundled environment. Some providers charge an additional fee for trustee services whereas others include these services with their basic package. These captive corporate trustees are fiduciaries but they don't make a big deal out of that fact, they simply consider it to be a necessary part of doing business.

The organizations that are marketing themselves as co-fiduciaries and are charging 25 basis points may not be adding any real value. You need to examine what they are offering compared to the vendors you represent to see whether there is any significant difference. My best guess is that this may be primarily a marketing and pricing strategy.

Question: What are the terms of withdrawing your 401(k) funds? Can you just withdraw them at any time, pay the penalties and be on your merry way? Or, do you have to quit the company or reach retirement age first?

TB: Access to your money is restricted while you still work for the employer sponsoring the plan because the government gives you tax breaks to help you save for retirement. Because you are taking advantage of these tax breaks, the government gives you only limited access to your money. There are only three ways you can legally get to your money while you are still employed:

1. Unrestricted withdrawals are permitted after age 59ý;
2. Prior to 59ý, withdrawals are permitted only for financial hardships. The IRS sets the rules governing such withdrawals, and not all plans allow hardship withdrawals; or
3. You may also borrow from your plan account if the plan permits this. The IRS also sets the rules for borrowing from your 401(k).

These opportunities to access your money are legally permissible but your employer must agree to include provisions No. 2 and No. 3 in the plan. For example, many plans do not permit borrowing because loans are a big administrative hassle.

You can do anything you want with your money after you leave your employer but you will, of course, have to pay tax on any money you withdraw. Keep in mind, you will also owe an early withdrawal penalty tax if you leave your employer before age 55 and do not transfer the money into an IRA or another employer's plan.

Ted Benna, creator of the first 401(k) retirement savings plan, will answer your most intriguing questions every Tuesday. With over 30 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored two books, Helping Employees Achieve Retirement Income Security and Escaping the Coming Retirement Crisis, and is President of the 401(k) Association. Ted is a frequent speaker at meetings of 401(k) plan sponsors and participants. His articles and comments have appeared in numerous publications, including The New York Times and The Wall Street Journal.

Read Ted Benna's Biography

Ted's Table Archives 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

401Kafe.com is the premier online community resource for 401(k) participants
Copyright ý 1996 - 2000 mPower. All Rights Reserved.

 

Section Guide | Feature Articles | The Experts | 401(k) ABC's Wall Street 101 | The Bear's Cave | 401(k) Frequently Asked Questions | Retirement Calculator