Lawmakers packaged, sold, and passed the CARES Act as a way to help retirement savers mitigate the COVID-19 crisis.
Buried in 880 pages worth of legislation, one section is intended to provide benefits for those retirement savers with a 401(k) plan. According to a piece on CNBC, one of those benefits allows you to withdraw cash without the normal penalties:
The first option lets you take up to $100,000 or 100% of your balance (whichever is less) without the typical early withdrawal penalty for participants under age 59½. You get three years to either pay the taxes due on the distribution or to replace the money and not owe taxes on it.
But if you need to withdraw some emergency cash from your 401(k) to help manage your finances during this crisis, you may run into challenges.
One of the main challenges is some plan sponsors aren’t implementing the changes yet. In fact, according to the same CNBC piece, “Fewer than half are doing so — although many are still deciding.”
Additionally, if you take out a 401(k) loan (instead of simply withdrawing funds) and you are unexpectedly laid off from your job, the CARES Act could hurt more than it helps. A piece on the Motley Fool explains why:
If you do end up losing your job down the road, you’ll still need to either repay the loan in full or consider it a withdrawal. So if you’re worried your job is on shaky ground, just be prepared for what that might mean for your 401(k) loan.
Simply put, if you are considering taking out a loan, you need to ensure that you’re prepared for any challenges that may present themselves.
“Hidden” 401(k) Fees Compound the Problem
According to a 2018 survey from TD Ameritrade, only 27% of respondents knew how much they were paying in 401(k) fees and an astonishing 37% didn’t realize they were paying fees at all.
That means there are millions of Americans that aren’t aware their plan administrator is “taking a cut” from their retirement savings at all. In some cases, this “cut” means sacrificing 1.5% of your savings so a plan administrator can do their job.
To mitigate the damage if you have a “bad” plan, you can try talking to your employer. However, most employers don’t provide many options, assuming they offer a 401(k) at all.
Don’t Let “Them” Hold Your 401(k) Funds Hostage
Whether it’s lawmakers passing bills like the CARES Act, or plan administrators that refuse to make changes or “take their cut” in the form of hidden fees, there are many ways in which your 401(k) can be held hostage. But the good news is, you have options.
For example, you can consider rolling some of your 401(k) into a “self-directed IRA,” which is a type of retirement account that allows the account holder to make the investment decisions, specifically where to invest and how much.
Given all of the hurdles that 401(k) plan participants can face, this may be the right time for you to look into making such a move.