Retirement portability is becoming a larger and larger issue in the defined contribution space. American workers are known for being job-changers. This has led to many leaving balances at their former employer’s defined contribution plan.
There are many compelling reasons to roll your 401k to your new employer’s plan when you change jobs. It appears that the main reason stopping most people from doing so is simple inertia…and a little paperwork. Retirement portability is not a one size fits all issue, but for many, the choice is clear.
OK, so what are the options available to employees who change jobs leaving a 401k balance at their old job? 1) they can simply leave the funds in the old plan, 2) they can choose to cash out, 3) they can roll-over the old plan into their new employer’s plan or to an individual IRA account or 4) they can purchase another qualifying investment such as an immediate income annuity (if allowed by the plan).
For many, a roll over into a new employer’s plan makes most sense and offers many features and benefits that could add-up to significant savings and security.
Roll Over is Simple
The most powerful part of a roll over strategy is that it is simple. Cashing out may be simple too, but carries steep tax penalties so it fails in the savings category. And while an IRA allows for virtually limitless investment opportunities, it kind of fails in the simplicity category.
Consolidating balances also may lower fees and expenses, this is the case in many circumstances versus holding multiple accounts.
Legal Protections
Keep in mind that retirement plans have certain legal protections from lawsuits, civil judgments and bankruptcy. However, the IRS can seize retirement accounts to collect delinquent taxes. These protections may not exist for individual IRA’s based on where you live.
Access to a Financial Advisor
Many companies enlist the services of a financial advisor that is accessible by its participants. These services often include wellness programs in addition to financial guidance and education programs.
The Future of Retirement Account Portability
In a blog written by Penchecks, the idea of a Master IRA is discussed. The basic concept is as follows:
Shortly after last year’s GAO report was released, there was another idea proposed that also seems to have merit. This concepts suggests that when someone goes to work for the first time with an employer that sponsors a retirement plan, that employee would have to establish a Default IRA that would be registered with the Social Security Administration (SSA). Every time the employee leaves a company with money in a retirement plan, those funds would be directly transferred to his or her Default IRA – without the need for time-consuming paperwork or benefit election forms. The individual would then have the option to transfer the funds to their new employer’s plan or leave it in this new type of Default IRA. This IRA could be invested in either an inflation-protected government bond or target date fund, as an example.
