Can I have complete control over my 401k? Yes, as long as you follow the rules.
The problem is that most companies do not want to offer you checkbook control over your 401k. There are good reasons for this. It is not just the administrative cost but the company has a responsibility for educating all employees about the investment options. So in practice all employers go with a plan sponsored by a brokerage firm or similar. The brokerage firm has an incentive to keep your money in their products, mutual funds, stocks, bonds, etc., the most risky of all investments. The typical employer only wants to offer a few options so for most people their 401k consists of five or six mutual funds. Maybe a bond fund, balanced fund, large cap, small cap, etc. And even worse there may be significant limitations on how many times you can change the allocation.
This is how Wall Street gets rich on the back of YOUR money.
So how can you control your 401k funds. I will discuss one option here. It is not for everyone as it requires you to have your own business. So if you are starting a company, or have a company, that company can sponsor a 401k plan. This is very easy if the company is just you, or you and your spouse. When you have employees you have to be in compliance with the regulations laid down by the Dept. of Labor. This includes things like non-discrimination etc. But if it is just you and your spouse it is very easy. Special plans are available for husband and wife businesses. (In later blogs I will show how our tax laws treat husband and wife businesses. They get the best tax breaks of all.)
The company sponsors a 401k plan, one person becomes the Trustee, the plan then opens accounts in the name of the husband and wife. These are called FBO accounts, that is “for the benefit of”. The reason for this is the way the law is structured. A pension plan is an individual plan within the 401k plan. There is no joint tenancy in a pension plan. You can transfer the pension funds by will between husband and wife, but the plans are treat husband and wife as individuals. This is the case on the tax side.
I will cover the differences between using an LLC and C corporation to sponsor the 401k plan in a later blog, as the amount that can be contributed is related to the salary compensation.
It gets better, now you are not limited to the allowable contributions, to the 401k and Roth 401k. In a business you can also contribute based on profit sharing. up to 25% of the companies profits can flow into the Traditional 401k. This makes for a great tax break.
If you are really profitable it gets even better. But more about that in a future blog.