What to do with your 401(k)

Changing jobs and wondering what to do with your 401(k)?

You have four options available for your 401(k) plan when changing jobs. Yet, almost half of job changers cash out.

A Harvard Business Review study found that approx. 41% of employees took a cash distribution when changing jobs. Of these, roughly 85% of those people cashed out the entire balance!

This is called retirement leakage, and cashing out can be detrimental to your long-term financial and retirement health.

Four options for your 401(k)

To provide framework, here are the four options for your 401(k) when changing a job:

1. You can leave the account where it is.
2. You can roll it over to your new employer’s 401(k) on a pre-tax or after-tax basis.
3. You can roll it into a traditional or Roth IRA outside of your new employer’s plan. However, rolling to a Roth is a taxable event, so it’s best to talk to your CPA and/or financial advisor to understand the impact.
4. You can take a lump sum distribution, which means cashing out the entire amount. Keep in mind that if you have less than $1,000 in the account, your ex-employer can simply cash you out.

Other factors to consider with your 401(k) options

If you have an outstanding loan against part of your 401(k) balance, it must be paid back before completing a rollover or cash out from the plan.

You’ll also want to check your vested balance.

You are entitled to 100% of any contributions you’ve made into the 401(k) plan. The amount of employer match you’re entitled to is based on the vesting period. A vesting schedule is based on the length of time required to have ownership (or vest) in the employer’s contributions.

If you’re 100% vested in employer contributions, you’ll receive all of the money the company has contributed on your behalf. If you have not been with the company for the required amount of time, you may receive only a portion of employer contributions.

Finally, you’ll want to compare the costs of your options. Ask for the participant fee disclosure for each plan. That document will reveal all the fees associated with each plan. Then, evaluate costs based on how your current money is invested. You’ll have a better idea if you want to keep your old 401(k), roll it over into your new employer’s plan, or roll it into an IRA.

401(k) savings rates are too low

According to Vanguard data from 2021, the median 401(k) account for a 55- to 64-year-old was $89,716. It’s an alarming statistic!

At this level, the income potential is small and may add very little support above Social Security.

Despite the high focus on saving, one key fact remains: In the U.S., employees can cash out part of their 401(k) while working, or all of it when leaving a job.

Among developed economies, only the U.S. allows firms to present this option to a departing employee!

In the U.S., employees can cash out part of their 401(k) while working, or all of it when leaving a job.

Why do people cash out their 401(k)?

One can argue this comes down to both bureaucracy and psychology. When you see the option to cash out, your brain sees money available that has otherwise been off-limits and out of reach.

Evidence supports the theory that the more money your employer has contributed, the more likely you will see that as “free money.” This “found money” effect can give one overconfidence in their ability to make better use of the money based on current life and market conditions. In addition, you may be inclined to think you will have plenty of time to resave the same amount of money over time.

The truth of compounding is that cashing out completely works against your long-term progress. Regaining the same savings momentum is nearly impossible once the process of compounding is stopped.

How employers can help

Employers can work with a financial advisor to develop a workplace financial literacy program. This type of program may be fully customizable to your workforce and can be built to accommodate and complement your existing retirement plan.

These programs are designed to help employees learn ways to relieve financial stress by providing a financial literacy resource. According to The Employer’s Guide to Financial Wellness, financial stress results in approximately 11–14% of annual payroll costs in lost productivity and increased turnover.

When structured and executed consistently, these programs have been shown to benefit the business by:

• Increases employee engagement
• Increases talent retention, which reduces costs for recruitment, training, and lost productivity due to staffing issues
• Reduces sick time taken
• Builds a culture of employees helping the company to become more profitable and productive, rather than resenting the company for doing so
• Reduces the “give me a big raise or I’m out of here” annual review negotiation

How to set up your workplace financial literacy program

Setting up a workplace financial literacy program requires a firm commitment to your employees and a good financial services partner. As a suggestion, your business can implement a “lunch ‘n’ learn” or “coffee and bagels” program. These can be help quarterly or semi-annually.

For the program, employees will hear an engaging presentation on a timely financial topic. As an added benefit, they can also opt-in to receive a short one-on-one session with the financial professional. In these sessions, they can have questions answered and receive financial tips. Should they wish to pursue further financial planning services, they can directly engage the financial professional.

Programs like these can go a long way to helping your employees and, in turn, help your business.

Own a business and want to learn more about setting up a workplace financial literacy program? Send an email to info@lifemoveswealth.com for more information.

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