What Are My 401(k) Options if I Leave My Job?

Transcript

This is Michael Sayre, your 401(k) advisor at CUI Wealth Management, your retirement plan partner. Today I am going over a common question from people looking at leaving their current company or who have left and have a balance in their retirement plan. But before we get to that, I want to remind you to like this video and subscribe to our channel so you can get more of this type of information regularly. 

So, what are your options if you have quit your job or are looking to move away from a company and have a balance in a retirement plan? 

The first option is to keep the funds in the current retirement plan. Even if you've left the company, you can often keep the funds in that retirement plan. However, sometimes there is what is called a force-out provision. A force-out provision makes it so if you've left the company and the balance in your account is below a certain amount, the former employer can force you out of the retirement plan. They first notify you and let you know that if you don't make any elections, those funds will be either moved to the IRA or you might get a check for the balance.

Generally, when this is the case, you get moved to an IRA if your balance is between $5,000 and $1,000. And if it's $1,000 or less, you get a check. If your account balance is high enough not to have that triggered or if the plan you're in from your former employer doesn't have that attached to it, you can keep those funds invested and continue to make changes as needed. 

Now, here's another thing to keep in mind. Suppose you leave the money with the former employer's 401(k). Contributions must go through payroll; you must be on the payroll to continue making additional contributions. 

The second option is to move those funds to a new employer's retirement plan. Say you have left the company. You go to a new employer, and they have a 401(k). Often they will let you move the funds from a previous retirement plan into that 401(k) or company retirement plan. Here are some things to keep in mind, though. First, it's good to look at the previous provider's fees and the new provider's costs. Generally speaking, you have expenses that can come from your account balance. You're not writing a checkout for those fees. An asset-based fee means a small percentage of your assets in that account are taken out to pay for some of the costs associated with the retirement plan. 

You can get a fee disclosure from your current and previous providers to compare the associated costs and make sure moving to the new plan makes sense. You can request that disclosure from your HR person or log in and find it online. Generally, what you will be looking for is the "fee disclosure" or "404(a)5 fee disclosure". The other thing to remember is to check how the investments compare. Because unlike other options, like moving to an IRA, which we'll get to in a minute if you transfer funds to a 401(k), you're limited to the investment options within that 401(k) plan. If the investments are not great, moving your funds to the new employer's 401(k) may not make sense. 

One of the reasons why many people move to a new employer's 401(k) is simplicity.

The third option is to move to an IRA. That can be done as a non-taxable event if you roll the funds from your previous provider to an IRA (Individual Retirement Account). The most significant benefit to that is unlike a 401(k), where you are limited to the investments available in the 401(k), moving to an IRA allows you to invest in just about anything you would like. 

The fourth option is you can cash out your 401(k). The main issue with this is that that becomes a taxable event. If you're under 59 1/2, there will also be a 10% tax penalty for early distribution. Remember, 401(k)s are made for retirement; they're not made to be a savings account that you're setting aside for whenever. We are not advising people to do that.

Those are your four main options. 

• Leave it where it's, as long as the employer allows it.

• Move to a new employer's plan, as long as that's allowed.

• Move to an IRA

• Cash it out

Another thing to remember is that sometimes funds have a vesting schedule. If you're still with an employer and have yet to leave but want to move to another job or are considering it, remember to see if there is a vesting schedule.

The funds you put in your retirement plan will always be yours. You can take those out in any of the different ways we have gone over. But the funds the employer puts in, sometimes there is a vesting schedule. If you have worked for that employer for an allotted time, you can keep the entire portion of their contribution. Sometimes it's a tiered structure where you're with that employer; every year, you vest 20 percent more from the match. So, for example, after five years, you'd be fully vested. Some have a cliff vesting where you don't keep any of that match until you've met a specific time of employment. But, the best way to determine if your plan has that is to contact the HR team or request a summary plan description (SPD) document. That document will give you a view of all the ins and outs of the plan, including the match, vesting schedules, eligibility requirements, etc. That's a great place to look. Another way to get vesting information is through the recordkeeper. They will often have that information on their website. 

These are your basic high-level view options and some of the pros and cons of these different options. Hopefully, this helps. If you're looking at any of those options, we ask that you take a deeper dive before deciding. You can reach out to us. We're happy to help you. I hope this has been helpful. Please like and subscribe. Our contact information is below. We're glad to help. Thanks again. This is Michael Sayre, your 401(k) advisor with CUI Wealth Management, your retirement plan partner.