401K Distributions for Dummies

Cashing out from your 401K

Back in your grandpa's day, people worked for the same company all their lives and retired with something called a "pension." You millennials may have never heard of a pension, and it's pretty likely you won't ever see one (unless you work for a governmental agency). Beginning in the '80s or so, employees have been much more likely to save cash for retirement in a self-directed plan like a 401K. But what happens to that money when someone reaches retirement age? You can be pretty sure that Alibaster Smith (fake name, no?) doesn't know, based on his answer to "How Is a 401K Paid After Retirement?"¹ for Leaf Group's Sapling.com.

Given that Smith claims to be a "registered financial consultant," you would expect his answer to be complete and accurate. Well, no: here's what tipped our staffer off to Alibaster's unfamiliarity with 401Ks, retirement, or both. It's right up front in his Demand Media-demanded introduction:

"401(k) plans are employer-sponsored retirement plans. These plans allow you to defer some of your paycheck to an investment account. The investment account is tax-free and allows you to invest in a variety of mutual funds."

We'd like to think that a "professional" like Albaster would be aware that the variety of financial instruments available to an employee varies from plan to plan, but most allow investments in more than just mutual funds. There are also bonds, cash, and usually company stock. But, there's more: there's always more. When it comes time to retire, according to Smith, "The disadvantage of receiving payments from your 401(k) plan is that the bulk of your savings remains invested in mutual funds." What's this yutz's hang-up with mutual funds, anyway? Is he unaware of the huge variety of funds and the varying levels of risk? Does he still think that 401K plans only invest in mutual funds? And then there's his mention that

"The benefit of taking payments from your 401(k) plan after retirement is that you don't have to move your money to another financial institution. You may take a lump-sum distribution..."

What, we wonder, does one do with that lump-sum payment: put it in a mattress?
No, if we want financial advice, we're sure not going to take it from someone with such a tenuous grasp on employee-sponsored retirement plans that he never mentions a 403b, never mentions required distributions after age 70½, etc. Is this guy a financial consultant, or is he a Dumbass of the Day? Our money's on the latter.

¹ The original has been deleted by Leaf Group, but can still be accessed using the Wayback machine at archive.org. Its URL was   sapling.com/7757167/401k-paid-after-retirement

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