Tag: 401k

401k Withdrawal

Sample MSA Language When There is a Retirement Plan Loan from Marriage


How Do You Handle A Retirement Plan Loan in a Marital Settlement?

Retirement plan loans are one of the most complicated aspect of QDROs to understand and handle correctly. A retirement plan loan is not actually “debt” as most attorneys understand that term. Instead, retirement plan loans can be thought of as a distribution, and generally should not be equalized with other types of debt (like credit card debt) in a family law divorce case. Here’s why.

When a participant from a retirement plan applies for a loan, the participant’s investments are sold in order to pay out the loan proceeds to the participant. Conversely, when the participant repays the loan balance, the participant retains their own loan payments and interest. Thus, in general, the account balance of a retirement plan already reflects a reduction for the loan.

It’s Important to Ensure One Party Is Not Hit Twice Financially

This can be a complicated analysis and not every plan is the same, but it is important to remember if there is a retirement plan loan, special attention should be given to make sure that one party is not hit twice with the financial aspect of the loan. Below is some common Marital Settlement Agreement language that may be helpful with regard to handling a retirement plan loan (see bolded sentence).

The parties agree that there is a community property interest in Husband’s [PLAN NAME]. The community property interest shall be determined by taking the account balance as of the Date of Separation, plus any contributions made after the Date of Separation that were earned during marriage, and adjusting that balance by investment earnings or losses in the Plan assets from the Date of Separation until the final date of distribution to Wife. Wife shall receive a 50 percent (50%) assignment of the community property interest using a Qualified Domestic Relations Order (“QDRO”). Any loans taken out during the marriage shall reduce the community property interest. The parties agree to jointly retain [QDRO ATTORNEY NAME] to be the neutral attorney to prepare the QDRO. The parties shall each pay half of [QDRO ATTORNEY NAME] fees and agree to cooperate with the QDRO process including providing all documents and information necessary for the preparation of the QDRO.

As always, different language may be appropriate on a case by case basis if there are unique facts.

Retirement Benefits Feature

Your 401(k) Assets Are Not “Old” – Think Twice Before Rolling Them Over

Almost every bank has some sort of advertisement that refers to your 401(k) benefits as “old” and encourages you to rollover your investments into an IRA. Wells Fargo’s tag line reads: “Consolidate old retirement assets with guidance,” Fidelity publishes articles with the headline “What to do with your old 401(k),” and, Charles Schwab has a TV commercial that opens with “Is your old 401(k) just hanging around?”[1]

These banks are all attempting to send home the message that your “old” 401(k) needs to be rolled over into a “new” IRA in order to have better investment returns. The advertisements in particular are appealing to your sense that you no longer work for your employer, so why leave your assets in your “old” employer’s retirement account? They are also implying that somehow 401(k)s only have “old” investment types available and IRAs have all of the “new” and better investments. This is simply not the case – ERISA retirement plan investments are reviewed each year by fiduciaries and participants with self-directed accounts in ERISA retirement plans actually choose their own investments.

Be Aware of the Downsides of Rolling Over your 401(k)

Furthermore, participants in a 401(k) plan should be aware of the downsides of moving funds from a 401(k) plan to an IRA which can include:

  • Higher maintenance fees charged for an IRA rather than to stay in the ERISA retirement plan. Fees in an ERISA plan are regulated by the Department of Labor.
  • More limits on investment options offered by the bank hosting the IRA compared to the investment options that an ERISA plan can negotiate for on a large scale basis.
  • Less protection of assets from creditors or legal judgments.
  • Higher transaction fees charged in an IRA than in an ERISA retirement plan.
  • More restrictions on withdrawing your benefits. (If you retire from a company at age 55 or older, you may be able to obtain penalty-free access to your 401(k) account whereas IRAs generally have a 59 ½ age requirement before benefits can be obtained penalty-free.)[2]
  • Fees for investment advice may be charged by the bank whereas in an ERISA plan your prior employer’s contract may include providing participants with investment advice for no fee.
  • No ability to obtain a loan from an IRA whereas many ERISA plans permit participants to take loans.

Wells Fargo even has a long disclaimer regarding rollover IRAs, but it is in the fine print:

“When considering rolling over assets from an employer plan to an IRA, factors that should be considered and compared between the employer plan and the IRA include fees and expenses, services offered, investment options, when penalty free withdrawals are available, treatment of employer stock, when required minimum distribution may be required, protection of assets from creditors, and legal judgments. Investing and maintaining assets in an IRA with us will generally involve higher costs than the other options available.” (emphasis added) [3]

The conclusion is simple:

ERISA plans should take pride in the upsides to participants of staying invested in the plan, and participants should consider their individual needs in order to make the best decision.

[1] http://www.ispot.tv/ad/7wxM/charles-schwab-ira-offer, https://www.fidelity.com/viewpoints/retirement/401k-options
[2] http://www.irs.gov/taxtopics/tc558.html
[3] https://www.wellsfargo.com/investing/retirement/rollover/