Adding In-Service Distributions to Your Plan - Is It the Right Move?
by John Carl, President, Retirement Learning Center

Our ERISA consultants on the Columbia Management Learning Center Resource Desk regularly receive calls from financial advisors who are working with business owners who sponsor retirement plans for their employees.  Recently, we have seen an increase in plan sponsor inquiries related to in-service distributions of plan assets, no doubt in response to a constricted financial climate.  Plan sponsors whose plans currently do not offer in-service distributions are surprised to learn how easy it is to add this option.

Through our relationship with the Columbia Management Learning Center, we regularly instruct Columbia Management’s financial advisor partners on which plans may offer in-service distributions, the pros and cons of including an in-service distribution option, and how to amend the plan documents to incorporate the provision.  A recent call with a Traditional Financial Services (TFS) advisor in New Jersey illustrates how a typical in-service distribution/plan amendment scenario would play out.

The advisor related how his plan sponsor client currently maintains a 401(k)/ profit sharing plan for his company. Several employees had asked about taking money out of the plan because their spouses had been laid off from their jobs, and they needed a temporary source of supplemental income. Currently, the plan permits distributions at termination of employment, age 70 ½ and retirement. The plan sponsor turned to his financial advisor to find out what, if anything, he could do.

Highlights of Recommendations

Several types of retirement plans can offer in-service distributions, including 401(k), profit sharing, employee stock ownership and even defined benefit plans.  If an in-service distribution option is desired, it must be formally written into the plan document, either when adopted or later through an amendment. The plan sponsor would need to check with his document provider for the exact adoption or amendment steps.

There are pros and cons to including an in-service distribution option in a plan. The pros include increased participant control of plan assets and a resulting higher level of satisfaction. The cons include the potential for greater administrative burdens and cost to the plan sponsor as a result of an increase in the number of distribution requests, potential taxes and penalties for the distribution recipient, and depletion of savings meant for retirement income.

If a plan sponsor wants to add an in-service distribution option, he can choose to make the option very liberal or attach restrictions such as a requirement to reach a certain age, complete a set amount of service or limit access to a particular contribution source (e.g., matching contributions). It is important to note that the IRS does not allow employee pre-tax elective deferrals to be distributed prior to age 59 ½, nor defined benefit assets to be distributed prior to age 62.

Conclusion

There has been increasing plan sponsor and participant attention given to in-service distributions of late.  With the expert guidance of the Columbia Management Learning Center, advisors can confidently assist their clients in evaluating whether adding, or changing the terms of an existing, in-service distribution option is the right move for them.

©2009 Retirement Learning Center

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