Dear Dave: Do I Own My 401(k)?

by David Lewis

Years ago, Yours Gluteny worked for someone else.

My employer offered me a 401(k) plan. I was 20 at the time, and didn’t really understand the value of retirement planning. I DID save money, just not for the long-term.

Anywho, when dot com crash happened, I was convinced I had made the right move to NOT have money in my employer’s retirement plan. My co-workers were all stressed out. One of my older friends would occasionally have a “break down” because she lost over $300,000 of her life’s savings. She couldn’t retire and she was in her mid 60s…

One day she was doing fine. The next, not.

I’m sure over the long-term, she might have recovered… but you and I have the benefit of hindsight. The market recovered, we saw another crash. Then the market recovered again just in time for the 2008 crash.

Most people can’t afford to waste 10 years of their life fooling around with losses waiting to come back. They have cars that need fixing, roofs that need repairing, vacations that need taking, kids that need school supplies, they have businesses that need starting…

And… they have retirements that need funding.

My friend would have been in her mid 70s by 2008-2009. How much longer could she have realistically waited?

Now, don’t get me wrong. Investing can be a good thing if you know what you’re doing. And, no doubt, some investors have profited from nearly every bear market. But, as with every market, timing is everything. You don’t get to choose when you need money for something. So, buying and holding every asset you own isn’t a practical option.


Lots of folks BARELY understand what they own inside their retirement account.

Qualified retirement plans are Government-created assets pursuant to Internal Revenue Code (“IRC”) section 401(a) and are held in trust pursuant to IRC §501(a ) and the Employee Retirement Income Security Act (“ERISA”) §403(a). This means that while you can direct the money in your account, there are many restrictions on what you can do with the money because it is being held for the benefit of your future self.

In other words, it’s not technically your money just yet.

Ordinarily, trust accounts don’t represent a real problem, because the trust is a contract that lays out all of the rules of the trust. If you are the contract owner, then at the very least, you know that you have legal control over what happens to the money.

This is not the case with government sponsored retirement plans. Yes, there is a trust account, but there’s not any private contract in place that puts you in full control of the money. Instead, what you have are various sections of law. The basis of all of your retirement accounts can be found in the ERISA statutes (fun reading!):

Sec. 1103. Establishment of trust

(a) Benefit plan assets to be held in trust; authority of trustees Except as provided in subsection (b) of this section, all assets of an employee benefit plan shall be held in trust by one or more trustees. Such trustee or trustees shall be either named in the trust instrument or in the plan instrument described in section 1102(a) of this title or appointed by a person who is a named fiduciary, and upon acceptance of being named or appointed, the trustee or trustees shall have exclusive authority and discretion to manage and control the assets of the plan

The only real exception(s) to the rule(s) are life insurance contracts and individual retirement accounts (IRA accounts). But of these, IRA accounts are governed by similar rules. They too, are trust accounts with various restrictive rules and more “for the benefit of” wording.

That leaves us with private insurance contracts.

So, do you own your 401(k) or IRA? Well, yes… kinda. It’s pseudo ownership.

Technically, the trustee has control over the assets in the plan (which is where your money is). And, the government is the one who sets the rules for said plan. Your plan administrator can deny you a plan loan, for example, for any reason or no reason at all. It doesn’t have to permit any withdrawals until you leave your employer.

Likewise, the IRS limits withdrawals and also plan loans.

Lots of people believe they can access their money though plan loans easily. About that… the IRS limits your access to the LESSER of $50,000 or half your account balance. And… depending on your employer, other restrictions can be layered on top of that. So, the account isn’t really made for access before retirement. It’s made for withdrawals after age 60 and then accelerated withdrawals after age 70.

Some people view this as a positive, owing t the fact that so many people are apparently financial irresponsible. But, if they are irresponsible, how does a retirement plan stop someone from doing something irresponsible with the money? It doesn’t. This is why 401(k) loan defaults are such a huge problem now, and why (when given the opportunity), people tend to cash out their 401(k) plan… paying taxes and penalties.

More to the point, with retirement plans you have the illusion of ownership over the funds while the trustee and (more importantly) the government retains ultimate control over your money.

Now, will they change the rules? I dunno. Maybe. Maybe not. You don’t know and you can’t know. This is part of the gimmick.

Tis why I often recommend having some money in a private insurance contract — something you DO have control over.

Ready to kick things up a notch?


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About David

David Lewis is a licensed life insurance agent, and has worked in the life insurance industry since 2004. During that time, he has worked with some of the oldest and most respected mutual life insurance companies in the U.S. To learn more about him and his business, go here.