401k what to do when retiring or a new job
2023.02.09 09:25
401k what to do when retiring or a new job
By Kristina Sobol
Budrigannews.com – When it comes to your 401(k), the old saying “you can’t take it with you” is not true.
You have three main options when you switch jobs or retire: Move your retirement account to a separate individual retirement account (IRA), transfer it to a new employer, or leave it where it is.
IRAs have been expanding. According to a recent Cerulli Associates report, IRAs will hold 38% of the retirement market in 2021, up from 31% today. By 2027, the research and consulting firm anticipates that percentage to rise to 41%, with rollovers accounting for the majority of that growth.
When is it prudent to withdraw from a 401(k) plan? That depends on how good it is. If you are enrolled in a 401(k) plan with poor investment options or high fees, a rollover may make sense. Sponsors’ and participants’ average total costs varied greatly, according to a Morningstar study; Some plans have total costs that exceed 3%, while others charge as little as 1% of your assets. Small businesses typically have these higher rates.
Send a written request with the following question to your employer’s human resources department if you are unsure about the cost of your plan: ” What are all of the fees I’m paying on my account, whether directly or indirectly? Make the same inquiry of any potential IRA provider.
Account consolidation is yet another advantage of rolling over. Over the course of their working lives, many people accumulate a number of retirement accounts as they switch jobs. A good way to stay organized and avoid losing track of your money is to get into the habit of rolling funds into a single, low-cost IRA as you move around.
You can keep your assets tax-deferred without paying taxes or paying penalties with a rollover. A direct rollover, in which your 401(k) plan sends a check or wire transfer to the new IRA custodian rather than to you, is the most effective strategy.
However, avoiding high costs is essential. The Pew Charitable Trusts conducted research last year and found that investors could lose thousands of dollars over time due to seemingly insignificant variations in total expenses, particularly the cost gap between retail and institutional shares.
Pew looked at the average institutional share class expense ratios and retail share class expense ratios for all mutual funds in 2019 that offered at least one institutional share class. Median retail shares had annual expenses that were 37% higher, according to the review; The differences were greater—around 41%—for hybrid mutual funds that held both equities and bonds.
Pew came to the conclusion that these differences resulted in direct fees of more than $980 million in a single year, as well as losses of tens of billions of dollars due to fees and earnings lost over a 25-year investing horizon.
Bob French, CFA, director of investment analysis at Retirement Researcher, which provides retirement guidance based on academic research, stated, “What you want to be looking at is, are you going to be able to accomplish your investment objectives more effectively with the options in your plan, or outside in an IRA.”
Staying enrolled in your 401(k) plan is also an option, particularly if you work for a large employer. Compared to some IRAs, big plans can negotiate lower fees. Another reason to keep contributing to your 401(k): The Employee Retirement Income Security Act (ERISA)’s fiduciary requirements require plan sponsors to prioritize account holders’ interests.
With IRAs, this is not the case. Additionally, ERISA safeguards most retirement plans sponsored by employers from creditors. Even though they are protected by federal bankruptcy law in the event that you file for bankruptcy, non-ERISA accounts like traditional and Roth IRAs do not have those safeguards.
There are indications that more retirees are adhering to their employer-sponsored plans after retirement: This year, 73% of the assets eligible for distribution remained in their plans, up from 66.5 percent in 2019.
According to Cerulli, this indicates that employers are increasing their efforts to incorporate retiree-friendly features into their retirement plans, particularly more adaptable methods for taking regular drawdowns.
David Kennedy, senior analyst for retirement at Cerulli, stated, “Not that long ago, there really weren’t good options for drawing down your money other than a lump sum distribution to an IRA.” However, a growing number of employers want to keep in touch with their retired employees in some way, and including more assets in the plan allows them to lower the prices of the investment options they offer.
