Navigating employer retirement plans
Know the ins and outs when making a career move.
Gone are the days of staying at the same job with the same company for decades. In fact, people aren’t even staying in the same line of work for a whole career anymore. According to research from the U.S. Department of Labor, the average American worker will change careers five to seven times throughout their life, and approximately 30% of the workforce now changes jobs every 12 months.
People are changing jobs for one reason or another – more money, less stress, more opportunity, more stability – and often their employer retirement account is not what’s top of mind. But when you’re switching jobs, you should always understand the status of your retirement account. Where is it held? How is it invested? What are the rules for transfers or withdrawals?
Here are some considerations to keep in mind as you embark on your new opportunity and leave the past in the rearview (except for your retirement account, of course).
Know your options
Before you start actioning a plan for your former employer retirement account, determine if any action needs to be taken in the first place. If your career move is between companies that are somehow related – as in a parent-subsidiary relationship, for example – they may be part of what’s called a “controlled group,” and no action on your part will be necessary. It’s possible that the same plan is offered with all companies in a controlled group.
If that’s not the case, there are a few options for you to think about.
Leave the funds where they are. The path of least resistance is to leave your account where it is. But the first step is to ensure that your former employer allows you to do so. If you can leave your account with your old employer and choose to do so, how can you make sure you’ll remember that money is there in 20, 30 or 40 years? An estimated 24.3 million 401(k) accounts with an average balance of over $55,000 were left behind by job changers in 2021.
The amount of money you have in the account may factor into whether you can keep it with your previous employer. Some employers require a transfer if there’s less than $5,000 in an account, or even automatically cut the employee a check for the balance if it’s under $1,000. (If your employer does this, you’ll need to sock that money into another retirement account ASAP, or face paying taxes and possibly penalties on it.) Something else to note is that employer plans often have higher fees and fewer investment choices while an IRA has more investment options, potentially lower fees, or might also include the help of a financial advisor.
Roll funds into a new plan. While keeping your balance with your previous employer plan can save you the trouble of a rollover, that might not always be the most beneficial move. Due diligence is important to avoid transferring funds from a former employer account to a more restrictive one. Some accounts have rules like not allowing you to access your funds until 65 years old, or not until you’ve been separated from the company for a certain number of years. You don’t want it to be more difficult to access your funds.
If you decide to transfer your 401(k) balance to your new employer’s plan, your top priority should be following the transfer rules to a T. A direct rollover orchestrated by your new employer’s plan administrator is the most straightforward method. If you don’t perform a direct rollover, you could face penalties and taxes on the transaction.
Cash out the plan. If you’re thinking about taking the money and making a run for it, think twice. If you don’t meet a 10% penalty exception, you’ll likely pay an early withdrawal penalty, plus income tax – state and federal – on the balance. You’ll also sacrifice the potential growth your investments could’ve seen with more time in the account.
What happens when you retire?
When it comes time to retire and you have retirement accounts scattered about, there’s no need to panic. If you have a variety of employer-sponsored plans – like 401(k)s, Roth 401(k)s, 403(b)s, 457(b)s, IRAs and Roth IRAs – whether you want to withdraw from the taxable accounts first depends on factors such as your tax bracket, account balances and other income sources. Your advisor, who understands your entire financial picture, should be able to advise you on what will be the most beneficial order in which to take distributions.
With any employer-sponsored retirement plan, you’ll be required to withdraw a minimum amount of money each year (a “required minimum distribution,” or RMD) once you reach your Required Beginning Date. This might get a bit complicated to keep track of if you maintain multiple accounts. Familiarize yourself with each plan’s terms because each may include additional specifications for accessing your money.
Always remember you have options for what to do with your savings in retirement plans. When changing jobs, consider those options carefully to position your savings to do the most for you.
If you’re about to make a career move:
- Assess what employer-sponsored retirement accounts you have, and how much money is in them.
- Look at each plan’s terms and determine what your options are for transferring funds.
- If you have questions or concerns, consult your advisor to determine how best to move forward.