The intriguing transition of switching to a career with a higher income and better benefits can feel exciting for most people that they focus all of their attention into welcoming the change. However, employees must never forget about their 401(k) from their old job before leaving for their new career.
According to a poll by Edelman Financial Engines, over four out of 10 people forget about their 401(k) investment with their former employer. Those adults are also unaware that they can continue to invest in their 401(k) even after leaving their company. Edelman Financial Engines, a financial advisory firm, got the statistics of uninformed adults from 1,071 people within the age range of 35 to 64.
According to the Bureau of Labor Statistics’ most recent data, over 3.5 million employees left behind their jobs in April, which is up from 3.3 million from the previous year. Despite the excitement that surrounds the move to greener pastures, RP Zeigler Investment Services founder Rockie Zeigler believes that forgetting the 401(k) is a massive mistake for employees. Zeigler, a financial planner expert shares that most adults tend to think about their salary, benefits, and health care that they forget about their old retirement plans in exchange for a new one in their upcoming job.
The Investment Company Institute revealed that it managed to save over $5.66 trillion from abandoned 401(k) as of March 31, 2019. Fidelity Investments currently have an average account balance of $103,700 for 401(k) by the end of this year’s first quarter. While it is not wrong to leave your money to your old employer, you miss out on having more money upon retirement.
The Employee Retirement Income Security Act protects a 401(k) plan from creditors and requires your company to prioritize the participant and beneficiaries’ best interest. If you decide to transfer your old employer’s retirement plan into your savings account, you will lose the protective services. Your IRA’s creditor protection will depend on your residing state. Also, the Securities and Exchange Commission approved a regulation that urges advisors to talk about conflicts of interest, but it does not mean that fiduciaries or your former employer need to get involved.
Manning Wealth Management wealth strategist Vance Barse also reiterates the importance of choosing the right advisor for your retirement plan. Fiduciaries are similar to brokers, which will hold your money and invest it in various products in the market. However, Barse emphasizes on the importance of hiring an advisor who will take care of your assets rather than gambling on bad investments.
What to Do With Your Retirement Plan
You need to think about your decision to abandon your old 401(k) plan from your previous employer when you switch jobs. Retirement plans’ fund fees fall over time. In 2000, the expense ratio average for a stock fund included in the 401(k) had an average of 0.77%. In 2017, the percentage went down to 0.45%, which means that you may get a cheaper retirement plan.
However, the fees included in a small 401(k) may get up to 1.95%, according to the analysis made by America’s Best 401k. Also, you may receive a 1% fee when you hire an advisor to take control of your investments, especially when the expert comes from a financial company.
You also need to consider a lot of factors when choosing to abandon or continue your old employer’s 401(k) plans for you. Leakages like unexpected withdrawals, cash-outs, and loans can affect your long-term savings goal. Leaving your old job with a loan against your retirement plan may force you to repay the debt. If you use your retirement plan to buy a car, you need to shoulder the remaining cost while paying your debt to your old employer. A poll by Edelman Financial Engines showed that over 30% of interviewed employees remain unaware that they may incur taxes and penalties if they used their 401(k) money instead of using it upon retirement. 401(k) withdrawals and cash-outs may also trigger a sentence of at least 10% and an income tax bill if you took it out before your 60th birthday.
Abandoning a 401(k) may also cause problems. According to WealthKeel founder and certified financial planner, Chad Chubb reveals that adults are trying to compare the two 401(k) savings from their previous employer and their new one before deciding to keep the existing plan or consider consolidation. Chubb states that rolling the old plan assets into a new 401(k) will depend on the rules of where you plan to work next.
It is essential for adults to avoid trying to deal with this problem on their own, especially if they do not have proper knowledge about financial planning and the rules of both the old and new employers. An employee’s best bet may be to consider hiring a financial advisor. However, it is essential for them to do a background check on a potential candidate before entrusting him or her with your financial future.