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Advice, please: My employer moved our 401(k) program from Vanguard to Empower. The offerings are skimpy: no target date retirement funds, no life strategy funds, no balanced or all-in-one funds. Instead we can choose from 15 funds, many of them with fees higher than index funds. When I ask Empower why it tolerates this weak menu, I get variations of, “Tolerate? I didn’t know we even allowed plans this narrow.” And when I invite the employer’s managers to broaden the selection, I get no response. I’ve spread money around enough of these funds to roughly approximate a target date fund, but constantly rebalancing is impractical. So is rolling my account into, say, a choices-rich Vanguard IRA; my attorney and accountant say that leaving the 401(k) plan would squander my credit protection against liability lawsuits and other types of claims against me. Should I continue to grin and bear it? Or do I have some other course of action, preferably one that won’t take me down a deep rabbit hole of corporate do-littles and overstressed regulators?
Blame your employer. I managed two 401k plans for a large employer. We did our best to offer a sensible range of investments including target date funds and three pre-mixed portfolios (conservative, moderate and aggressive) plus several index mutual funds including international plus a GIC. The idea was to make choice as easy and understandable as possible.
I sure would not leave your 401k to the extent you leave an employer match behind.
A few years after I retired I rolled my 401k and all other investments into Fidelity and have been very pleased with doing so. It’s also linked to our bank accounts.
As someone who’s also considered leaving my 401k plan, I’ve read that you can keep many of the protections by making sure to keep the Rollover IRA you move into separate from any other IRAs you may have.
When I rolled over my 401K to IRA after leaving each job Vanguard named the account as such.
If you are retired, or when you do retire, you should consider rolling over the funds to Fidelity, Vanguard or Charles Schwab.
In regard to protection…. If you were to ever file for personal bankruptcy, all your 401(k) rollover funds are 100% protected with no dollar limit under the federal Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). As long as the funds were rolled over from a 401K they will always be protected. However, federal law does not protect IRAs from civil lawsuits (such as car accidents, business liabilities, or personal injury judgments). Instead, your level of protection is dictated exclusively by the state where you reside. The way around the lawsuit protection is just what Mark Crothers suggested- look into an umbrella insurance policy. I live in Michigan which means only $1.5 million is protect. Check your state protection amount and consider umbrella insurance.
A few thoughts I had after reading your post. Below are my experiences and choices that may benefit your planning.
I always contributed to my employer’s sponsored retirement plans if there was any free money employer match to be had. I typically picked the plan investment with the lowest expense ratio when the other investment options were poor. One employer 401(k) I was in had lots of high expense options an a single option of a somewhat low expense S&P 500 mutual fund where I directed 100% of my 401(k) contributions. Look for the low cost option in your plan. If no low cost option ask your employer to add at least one low cost option. I would make the request in a written format. I would hope your employer wants the best plan options for the employees at the lowest cost. The long term highly compensated employees(HCE), often the owners in a small company, would be doing themself a disservice by not getting the best plan available at a reasonable cost in terms of both money and time. HCE’s often have the largest balances in a retirement plan.
If the employer plan had lousy options with high fund expense and/or employee plan fees I would consider whether I was better off using a tax deductible higher contribution into the employer 401(k) or better off with a IRA, paying down any personal debt or investing in a taxable account. At some times while I was working my diversification was across our entire portfolio, not just my current 401(k).
One thing I realized later in my career when I was older (age 68) was that some retirement plans have a vesting schedule and that vesting schedule may be superseded by ERISA rules that allow the short term older employee to keep the full employer contribution upon termination once you reach the plan’s normal retirement age(NRA). Many plan adoption agreements set NRA at age 65 as the maximum. I recommend you get out your Summary Plan Description and understand the plan before taking action. Verify your understanding with human resources and/or the plan custodian.
Every employer plan I was ever in allowed distribution only upon termination of employment although some plans allow in service distributions when you attain a certain age. I always did a trustee to trustee direct rollover for my distributions. If you take a 401(k) plan distribution payable directly to you that distribution is subject to a IRS mandatory 20% FWT. I never wanted any FWT withheld from the complete plan distribution.
I opened a small Roth IRA for both me and my wife a long time ago. There are five year requirements for the best tax results for Roth IRA contributions. There is also a separate five year rule for Roth conversions that you need to understand before making any Roth distribution. Understanding both types of Roth 5 year rules is time well spent in my opinion. Having Roth accounts may give you, a spouse or your heirs more tax flexible that you may want later in life. Before my retirement as a public CPA I would often ask as my final question if my client had their IRA, life insurance and plan beneficiaries and contingent beneficiaries as they currently intend. Verifying your beneficiaries in a formal manner annually is a good habit to have. After a major life event is also a time to revisit beneficiary designations. Everyone should know that who you name as beneficiary for your IRA, 401(k), etc. typically controls who gets those assets, not your will.
I had similar concerns that you have about asset protection differences between a 401(k) and IRAs. I know there are differences between federal and a specific state rules and also differences between asset protection for liabilities in and out of bankruptcy. Good to read you discussed this issue with your attorney. My decision for our asset protection was to spend a few bucks and buy a sufficient personal umbrella policy. I recommend watching Dr. Jim Dalhe’s 2024 Boglehead’s conference video on asset protection for his great suggestions that includes appropriate umbrella insurance.
Much of this you may already know and you have planned for.
I hope this helps.
Bill
I wonder why your employer switched from Vanguard to Empower. Somebody getting some sort of kickback or gifts under the table for switching?
Gee whiz, Jack, such a thing would never happen. Would it? If not kickbacks, perhaps some serious schmoozing; golf outings, nice dinners….. The plan described here reminds me of the plans that were common in the early days of the 401(k).
Lots of good advice so far. Get the employer match, keep rollover proceeds in a designated IRA, and buy that cheap, yet important umbrella insurance.
JM, no advice here, but on the liability issue: could you move the funds to an IRA as you’d like, and simply take out an inexpensive umbrella insurance policy to cover any loss of asset protection?