The Experts

Ask the Expert

	By: Ted Benna Creator of the first 401(k) plan
December 19, 2002 This Week, Ted Tackles: Readers' suggestions for teaching kids about money and saving ı Can I transfer money from my 401(k) to an IRA to get better investment performance? ı My employer changed investments in our plan, forcing many of us out of the old investment. Is this allowed?

TB: In my last column I asked readers to share their thoughts about good games or Web sites to teach children basic financial concepts and the importance of saving.

Unfortunately, those looking for gift ideas will be a bit disappointed. It turns out the suggestion most parents offered was giving the kids an allowance. The lessons learned through the practical experience of managing an allowance are better than any game can teach. An allowance teaches budgeting and purchasing lessons as well as the importance of saving.

Mary Lou Maloni and her husband Michael, Chicago-area parents of three kids, were one couple who offered this suggestion. Their ideas illustrate one family's way of handling allowances.

The Maloni kids must allocate their money among three expenses: charitable giving, short-term spending and long-term spending.

The Malonis help their children sort out legitimate charities from spurious organizations. The kids tend to favor kid-oriented charities.

The money allocated to short-term spending usually goes for candy, gum or magazines. "This eliminates a lot of the 'Mom, I want X' since the cost is theirs," said Mrs. Maloni.

The kids must set a goal for their long-term saving and spending. This teaches them to defer significant purchases until they have enough money.

When kids manage their own money, they learn how to save it and how to spend it so they get the most out of it. For instance, Mrs. Maloni said her son saved up enough to buy a battery-powered dinosaur. But, when he went to the store, he realized that for the same amount of money he could get 10 smaller dinosaurs. They didn't require batteries to operate, only his imagination.

The Internet offers a good selection of kid- and money-oriented sites to support an allowance program. Here's a short list of Web sites to consider (links are in the More Information sidebar):

kidsmoney.org -- This site has articles about allowances, saving, and teaching kids about money. It includes lists of suggested books, games and other helpful Web sites.
americanbaby.com -- This site is published by American Baby magazine and includes a money game and an article about allowances.
forbes.com -- Forbes.com's list of favorite Web sites that teach kids investment principles.
One reader suggested the National Association of Investors Corporation Web site, naic.org. The organization offers youth memberships and a book.

Q: Is it possible to transfer funds from my 401(k) to a self-directed IRA in order to get better investment performance? I think I read somewhere that it was possible to do so even though I am not leaving my current employer. Would the contribution to such an IRA qualify as a normal IRA contribution as long as it meets the annual contribution limit, $3,000 in my case, for all IRA contributions?

TB: No, you may not make such a transfer unless you meet one of the legal requirements for withdrawing money from the plan. These include leaving your employer, attaining age 59 1/2 or taking a hardship withdrawal. These are the instances when you are permitted to withdraw your pretax contributions.

My employer has several investment options in the 401(k). The 401(k) committee recently reviewed them and felt it needed to drop one fund in favor of what it thought was a more stable fund. The employees did not have the option of leaving their current savings in the dropped fund. Several co-workers who understand market fluctuations think that the old fund will come back quicker than the fund the company chose. We do have the option of moving the money to other funds, but the old fund is no longer an option. Can the company do this?

The company thought it was doing its fiduciary responsibility by moving the money for us, but we are of the opinion that the company cannot make personal investment decisions for us.

TB: Yes, your employer has the legal right to change any of the funds at any time. In fact, the employer has a fiduciary responsibility to do so if the fund has been underperforming, drifts from its style, changes managers, etc. Replacing a fund is a tough decision because picking funds is far from an exact science. There is always a risk that a new fund will not perform as well as one that is replaced.

I have attended conferences where ERISA attorneys and other consultants have told employers that it is their responsibility to replace funds that have experienced "style drift" or that have underperformed.

But, these moves can sometimes backfire on the employer. The old fund may rebound and perform better than the one chosen to replace it. I know of situations where this has occurred.

The conflict these situations create is one of the reasons why we should perhaps change the law to give employers the opportunity to select an investment structure that would remove them from this responsibility. One of the questions I have been asking for the past couple of years is whether it makes sense for employers to be responsible and liable for how employees invest their retirement savings. They are, currently.

Unless the law changes, both employees and employers will have to live with the current system, which gives the employer ultimate control and responsibility.

Ted Benna, creator of the first 401(k) retirement savings plan, answers intriguing questions twice a month. With over 40 years of experience as an employee benefits consultant, Ted is a nationally recognized expert on benefits issues. He has authored three books, Helping Employees Achieve Retirement Income Security, Escaping the Coming Retirement Crisis, and Tips for Successfully Managing Your 401(k), 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.

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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.