Why Wait Until You Retire to Take Control of Your 401(k)?

Times are constantly changing, especially when it comes to the hard-earned dollars you’ve been saving for retirement. In past decades, most American workers received a pension when they retired. This offered a monthly income stream, paid by an employer, that lasted throughout a retiree’s life.

Today, most people must rely on themselves to create an income stream in retirement. With pensions becoming a thing of the past, employers instead are providing their employees retirement accounts, such as 401(k)s.

Where It All Began

The 401(k) was created in 1978, and companies started offering this plan to their employees in the early 1980s. Today, the 401(k) has become the front-runner of retirement plans.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

There are many pros and cons that come with a 401(k), which can only be accessed through an employer-sponsored plan — unlike other options, including IRAs. The main benefit of a 401(k) is the possibility of a company match. Many companies allow their employees to contribute up to a certain percentage each month, which is then matched by the company. Every employer is different, of course, but receiving a match from your company is a great benefit.

But there are downsides to 401(k)s, including limited investment options and the internal costs that many people pay on their accounts, such as various mutual fund fees. In 2012, after 30 years of companies not having to disclose their fees, the U.S. Department of Labor published final regulations on fee disclosures for 401(k)s and retirement accounts.

A Pensionless Society

We now live in almost a pensionless society, which makes it extremely important to create a plan for your own retirement. You must take control of your retirement accounts so that your money is working for you in the best way possible.

The first step to securing your retirement is to take control of the wealth you worked a lifetime to create. When you’re in your 30s and 40s working and saving money, it’s likely that most of your money is in “Wall Street World,” and, I hope, growing for retirement. At this stage in your life, you have both time and earning capabilities on your side. If the market takes a dive, like it did back in 2008, you’ll see a big drop in your invested accounts, but you still have income coming in and time to make up the losses.

However, when you’re in your 50s and early 60s, you cannot afford a big hit on your investments, because you probably have neither time nor earning capabilities on your side. This is where you need to look at your money and make decisions to start taking risk out of your portfolio.

In-Service Rollover

If you’re 59½ years old and still working, you have the ability to roll over money from your 401(k) into an IRA. This is known as an in-service rollover, and it comes with no income restrictions and only minimal fees (usually $20 to $40, depending on your company’s rules). There are four reasons why you should consider an in-service rollover:

• 1. You are in control of your money. In a 401(k), your options are limited. If you roll your money into an IRA, you have the whole financial universe at your fingertips. You can do what is in your best interest, not your company’s.
• 2. An IRA gives you more investment options to choose from. This will allow you to allocate your money to fit your exact needs in retirement instead of just the options that are available in your 401(k).
• 3. There are more safe havens for your money in an IRA. The Stable Value fund may be the only safe option in your 401(k), but an IRA allows you many different options to help insulate your portfolio from a market downturn.
• 4. You can automatically set up your account as a multigenerational IRA (or “stretch IRA”). Once the owner of an account passes away, this step allows their beneficiaries to stretch their payout over their life expectancy, and greatly reduce their tax burden.

Take Control Today!

In today’s economic environment, you must take control of your retirement accounts. Don’t depend on someone else to take care of you. The days of an employer providing a lifelong income stream are gone. It is your responsibility to be proactive — and build your own financial plan to get you successfully to and through retirement.