Money on the Table
Sometimes life calls for a change. After a restless year inside, many are feeling that it is time for new beginnings. We are currently sitting in the midst of a labor market sea change, and we have been for several month’s time. In the United States, workers are quitting their jobs at the highest rate since the Bureau of Labor Statistics started their Jobs Opening and Labor Survey (JOLTS) [1]. Of course there are a lot of moving parts in the process of changing jobs, but judging whether or not you should leave your assets in your former employer’s 401(k) plan should absolutely be added to your checklist in the transition process. A recent MarketWatch article cites that “about $1.35 trillion are in ‘forgotten’ 401(k) plans by more than 24 million participants, according to a recent study by Capitalize,” and that “about 2.8 million 401(k) plans are left behind every year, the researchers found” [2]. The easiest action is no action. It requires no effort to simply leave assets at your former employer and start a new plan, but like many things the path of least resistance is not necessarily the best one.
If you are no longer working for the employer sponsoring your 401(k) plan, you have the ability to roll your assets into your new plan, or into an individual retirement account, both options involve no tax liability as long as you deposit within 60 days of the distribution. Both are suitable as far as consolidating assets and enabling further contribution to the account, adding to your principal. You may also withdraw cash from your 401(k), but in that case you will be forced to pay 10% tax on the withdrawal if it is taken before you turn 59.5 plus federal and state tax (if you live in a state with state income tax). If funds are cashed from the 401(k) plan after you turn 59.5, you will still pay federal and state income tax on the distribution - but you will avoid the 10% early withdrawal penalty. Depending on your individual scenario, rolling the money into an individual retirement account may be preferable as you will likely have greater flexibility as far as your investment options. On the contrary, in a 401(k) plan, participants are offered a select number of mutual funds, target date funds, or collective investment trusts. This is not the case in an individual retirement account; you have the ability to invest in virtually any fund under the sun, even direct ownership of real estate if held in a self-directed IRA - unconstrained by the selection limitations of a particular 401(k) plan.
From a simple bookkeeping perspective, consolidating assets into an existing IRA, your new 401(k), or a new IRA is beneficial to grasp your financial picture down the line as opposed to leaving assets in a former employer’s plan. Housing your assets in an old plan will involve the conduit of your former employer’s plan provider. In many cases, people forget about plans entirely. The MarketWatch article continues, “the average balance in a forgotten 401(k) is $55,400, the report found. Forgotten 401(k) plans could cost individuals nearly $700,000 in lost retirement savings over their lifetimes because of the risks of higher fees and lower returns”.
Even if we put the possibility of entirely forgetting about a former 401(k) plan aside, a central aspect of retirement planning is optimizing in all possible scenarios, which means reducing fees when one has the ability to do so. There is no reason to continually pay the often-higher expense ratios for mutual funds in a 401(k) plan, or third party administrator fees, or individual service fees if you do not need to. This will dampen returns over time if left alone, and there is no justifiable reason to pay such fees if you are no longer also getting the benefit of an employer 401(k) contribution match if your former employer offered one.
There is a reason that the most common onboarding process for a 401(k) plan is auto-enrollment - because it requires no action. A new participant needs to actively opt out of a plan if they do not wish to contribute. There has been success in the auto enrollment strategy to increase plan participation among new hires. The same notion on the back end commonly holds true, many individuals opt to do nothing when they leave a job, which results in 401(k) plans that are forgotten, as no action is taken unless the former employee actively chooses to roll assets out of a plan. Overall, taking stock of your previous jobs and whether you have left money in old plans is worth thinking about, especially considering the increased investment flexibility and likely reduced fees if your money is moved to an IRA. We can all benefit from some financial housekeeping, consolidating assets from old plans is another way to simplify and work to optimize your individual scenario going forward.
Disclosures:
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Financial Consultants at Vintage Wealth Advisors are registered representatives with, and securities offered through, LPL Financial, Member FINRA/SIPC. Investment advice and financial planning offered through Financial Advocates Investment Management, DBA Vintage Wealth Advisors, a registered investment advisor. Financial Advocates Investment Management, Vintage Wealth Advisors, and LPL Financial are separate entities.