Know Your 401(k) Options

It’s been 2 years since the pandemic began and the country began shutting down. Lately, I’m feeling a sense of renewed optimism that life is slowing returning to something that somewhat resembles normal. Of course, not everything has reached normal yet. We’re still seeing higher costs in food, gas prices are off the charts, the heating bill doubled, inflated used cars, I could go on and on. Luckily unemployment, though, seems to be decreasing. COVID did a real number on that – in fact, in the early months of the crisis, tens of millions of people lost their jobs. The unemployment rate jumped in April 2020 to a level not seen since the 1930s — and stood at 4.9 percent in October 2021, compared with 3.5 percent in February 2020. In early 2022, some 3 million fewer people are employed than before the pandemic, though steady progress continues to be made₁. 

Many of the newly unemployed who contributed regularly to their company’s 401(k) plans had some choices to make about their savings once they left the job. Get this, according to a recent study by Fidelity, only 6% of the unemployed withdrew their company plan savings when they left the job while 23% rolled their savings into an IRA. About 18% decided to leave their savings with their previous employer, while almost a quarter (22%) were still deciding what to do with their savings₂.

You see, it doesn’t matter if you’ve been laid off or if you quit to take on a new job – you have choices to make about your savings. I find, too many folks aren’t aware of their options so they do nothing and let the funds just sit in their previous employer’s plan. But this lack of a decision is, in fact, a decision and it could have financial consequences. So this week, Iet’s take a look at some options in the event you find yourself leaving a job where you’ve accumulated savings.

For starters, if you leave your job, by choice or not, you are entitled to the amount in your plan that is what’s called “vested”- unless the plan provides otherwise which is rare. This includes all of your own contributions to the plan and the investment earnings on those amounts. It also includes any contributions that your employer made on your behalf (often considered an employer “match” or nonelective contribution) and their earnings that have satisfied your plan’s vesting schedule.

Laws around vesting typically mean that you must be 100% vested in your employer’s contributions after 3 years of service or else you must vest gradually, 20% per year starting the second year until you’re fully vested after 6 years. The vesting schedule is important for you to know because you aren’t entitled to any employer contributions that are not vested.

So, once you understand how much your plan is worth to you, you need to decide what to do with these funds. Financial experts will typically advise you to absolutely NOT take the money out and spend it unless you have no other options. Not only will you eliminate your retirement savings, but you’ll also be taxed on the funds assuming these funds were all pre-tax contributions, like most IRA and 401(k) plans. And, if you did not reach yet age 55 in the year you left, an additional 10% penalty may apply to the taxable portion of your payout. 

Most companies will allow you to leave your money in your old employer’s plan, subject to account minimums.  In these cases, you can usually leave the money there until you reach the plan’s normal retirement age (typically age 65), and sometimes later. In this situation, you can’t make any further contributions to the plan. Many folks elect to move their money once they’ve left their employer to regain more control over it. But there may be valid reasons for leaving it there. You can take penalty-free withdrawals from an employer-sponsored retirement plan after you leave your job, if you leave in or after the year you reached age 55. Otherwise, you would need to wait until you reach age 59 ½ or qualify for some other exception to the penalty.

Once you find new employment, you can roll the funds in your old employer’s plan to your new company’s plan if they have one, providing they allow such rollovers. One benefit of this is the ability to consolidate your retirement plan assets so that you can keep tabs on them. It’s not unusual for some folks to hold multiple jobs over their careers and lose track of funds held at various old employers. By rolling your 401(k) funds into a new employer’s plan, you retain control. 

A final option – and one that I often recommend – is to roll your old 401(k) funds into an Individual Retirement Account, or “IRA”. This is a great opportunity to add a level of stability to your retirement plan due to the broad range of investment options available to you. Unlike the 401(k) options that are primarily market-based, an IRA allows you to implement a downside risk mitigation system by using quantitative data to help manage your process and control your risk. This is especially important the closer we get to our distribution, or retirement, years where we need these assets to produce income for the rest of your life.  Simply ask yourself when you look at what happened to your retirement plan in March of 2020, “What if it did not bounce back?”  What if 2020 turned into 2008 where it took many investors 6-7 years to recover?  Don’t let a “What if” turn into an “Oh No!”. 

Folks, changing jobs can be stressful. Losing one even more so. I get it.  But this is a good time to review your options and remind yourself that you have choices to continue growing your hard-earned savings – so use this opportunity to get your savings back on track to your own new “normal”.

And as always – be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter offers investment advisory services through Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield. 

Jeff can be reached at jeff@cutterfinancialgroup.com. Insurance products, including annuities, are offered through Cutterinsure, Inc., (MA insurance license #2080572). Cutter Financial Group and Cutterinsure are affiliated and under common control but offer services separately. Members of Cutter Financial Group’s management receive revenue directly from Cutterinsure. Any compensation received is separate from and does not offset regular advisory fees. Cutter Financial Group does not charge advisory fees on any insurance products. We do not offer tax or legal advice. Always consult with qualified tax/legal professionals regarding your own situation. Investing in securities involves risk, including possible loss of principal. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. This article is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Market data and other cited or linked-to content in this article is based on generally available information and is believed to be reliable. Please contact us to request a free copy of Cutter Financials’ Form CRS, Form ADV 2A and applicable Form ADV 2Bs. 1 https://tinyurl.com/yeym5hfn  2. https://tinyurl.com/4ttz9hfn