The 1 Thing You Can’t Forget to Take When Leaving a Job
Some people take more care boxing up the pens, paper clips and coffee cups in their desks when they pack up for a new job than they do wrapping up their 401(k) for departure. There's big money at stake, so plan ahead.
Switching jobs can be both practical and necessary, and today the average American changes jobs an average of 12 times before he or she retires. But are you forgetting something when you go?
With a new job comes many financial considerations. You’ve probably also thought through how your new salary, job location and duties will impact your quality of life. Unfortunately, you could be overlooking one very important piece of your future when you leave one employer for another: Your 401(k). About 33,000 401(k) accounts are abandoned every year, according to Charles Thorngren, CEO of investment firm Noble Gold, in a Marketplace interview in December.
Don’t Let Your Account Become an Orphan
There is such a thing called “orphaned retirement accounts.” These are accounts that have been abandoned by either their owner (you), plan sponsor (your former employer), plan administrator (company managing the assets within the retirement account) or a combination of these parties.
When you leave your employer and forget to roll your 401(k) retirement assets into a new retirement account you can take with you, it’s like leaving your money in a drawer and forgetting about it — but with compound interest growth.
You’ll want to take your retirement assets with you when you leave an employer, but if you suspect you may have left one of your jobs without taking your retirement assets with you, the U.S. Department of Labor offers resources to help you track down abandoned plans.
Ways to Take Your Old Company 401(k) with You
First off, it’s usually never a good idea to cash out your 401(k) in a lump sum. For most who have a traditional 401(k) (not a Roth) this is pre-tax money, meaning as soon as you take the cash you will owe taxes on the funds as if it was income you earned in that year. Second, if you’re starting a new job, that means you aren’t yet retired, so you shouldn’t be using your retirement funds just yet!
So, you have a couple options for how to move retirement assets when you change employers.
1. Roll Your Old 401(k) into Your New Employer’s 401(k) plan
When you move to a new employer, you can participate in their company’s 401(k) retirement plan either right away or after a stated probationary period. If you can’t join their plan immediately, you can simply leave your 401(k) assets parked where they are with your old company’s retirement plan and then transfer them over when you are able to join your new company’s plan.
2. Roll Your 401(k) into an IRA
I tend to like rolling old 401(k) assets into an IRA. “Rolling” one type of retirement account into another means moving assets from one account to a new account. The term “rolling” is important, because it is a non-taxable event sanctioned by the IRS.
How to Compare Costs
While in most cases the total cost of an IRA will be less than a 401(k), you will need to confirm this. You can do so by totaling up all of the below fees for the each of the accounts.
- Pros: First, it’s the simplest option. All of your retirement funds remain in the same place and continue to grow. Second, 401(k) plans may allow you to borrow more for your first home, up to $50,000 (vs. an IRA, which allows you to borrow up to $10,000).
- Cons: The plan administrator costs of your 401(k) can be high and your investment choices may be limited.
- Warning: When rolling over assets, the funds often move as a check. It’s critical that the check not be made out to you personally (it should be made out to the new bank/custodian who will hold the funds, with you listed as the beneficiary, such as Bank of USA FBO Mr. Smith). In addition, the check should go directly to the bank, not you. Having a check made out to or sent to you could be deemed taking possession of the funds in the eyes of the IRS, which could make it a taxable event. That would cause you to owe taxes on the funds plus a possible early withdrawal penalty.
- Pros: IRAs typically have lower total costs, specifically due to the fact they don’t have the administrative fees that 401(k) plans do. Second, IRAs offer much greater investment choices than 401(k) plans do.
- Cons: Unless you have your retirement assets managed with an adviser, you won’t get financial advice to help you select the best investment strategy for your situation. Second, opening up an IRA may limit your ability to utilize a backdoor Roth strategy that becomes necessary when you exceed the income limits for these tax-preferred retirement accounts.
- Warning: Just like with rolling your 401(k) over into your new company’s 401(k), if not executed properly, you will owe taxes and fees.
- Plan Administration Fees (401(k) only). As a plan participant, your company’s retirement plan administrator is obligated to send you what’s called a 404a fee disclosure every year. Reference this document to discover the plan administration fees you incur by participating in your company-sponsored retirement program. IRAs, on the other hand, won’t have plan administrative fees. Instead, they may have account fees or maintenance fees, but oftentimes these are very small or not applicable.
- Investment Fees (Both 401(k) & IRA). Be sure to compare fees for the investment management of your retirement fund. Most investors pay two main fees. The first — for those who use an investment adviser, or even a robo-adviser, to manage their IRA funds — is an advisory fee, which is typically a flat percentage charged by the adviser to manage your assets. This fee should appear on the 404a. The second fee is the expense ratio, which is the amount the investment fund charges the investor for purchasing it. For example, if you invested in the JP Morgan Diversified Return International Fund (Ticker: JPIN) you would be paying 0.43%, or the expense ratio. You can find fund expense ratios by typing the individual stock tickers into Yahoo Finance or Google. Note: You will never see the expense ratios paid from the fund on your statement. Instead, the fund share price is adjusted down to cover the cost of management.
- Individual Service Fees (401(k) only). In addition to overall administrative expenses, there may be individual service fees associated with optional features offered under a 401(k) plan. Individual service fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions.
Whether you switched employers months or years ago, or are making a change right now — don’t forget the retirement assets you’ve worked so hard to accumulate at every stage of your career. If you think you may have left some behind, it’s not too late to claim them. And as you navigate your career and likely change employers again sometime in the upcoming years, be sure you’re researching and determining the best course of action for managing these funds in the future.
About the Author
Founder, Lake Road Advisors, LLC
Paul Sydlansky, founder of Lake Road Advisors LLC, has worked in the financial services industry for over 20 years. Prior to founding Lake Road Advisors, Paul worked as relationship manager for a Registered Investment Adviser. Previously, Paul worked at Morgan Stanley in New York City for 13 years. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN). In 2018 he was named to Investopedia's Top 100 Financial Advisors list.