In the first of this three-part series on the dos and don'ts of retirement savings, I reviewed how to best manage a 401(k) or similar employer-offered benefit. But as today's companies continue to combat the tough economy by downsizing, this installment explores what to do with your employer-offered retirement plan if you lose your job. Here's what the experts advise:
1. Take a Deep Breath: "The first thing to do is relax," suggests Christopher Hickey, a financial adviser at Merrill Lynch (BAC) "Most people are going to switch jobs numerous times during their career. This is a normal process. You want to continue to keep your eye on the ball, and that's retirement."
2. Avoid Rash and Rushed Decisions: Obviously, losing your job is stressful, and sometimes, in the desire to get through the process of disentangling ourselves from our former employers as quickly as possible, we act rashly. It's important to counter that desire, and take your time to sort out your next steps regarding your benefits.
"Typically there's no rush," explains David Wray, president of the nonprofit group Profit-Sharing/401(k) Council of America. "If the amount is over $5,000, you can leave it with your former employer until age 65. What you need to do is take your time and determine what makes the best sense for you. And you do that by comparing the current plan arrangement and at least two IRA arrangements. Do a little spreadsheet, and look at the investment options and the fees. Some of these very, very, large plans have incredibly low fees, and you don't want to lose that if fees might be higher at an IRA. On the other hand, some fees at smaller companies might be higher. So, it's that combined with available investments. If you decide to roll it to an IRA, the company [you are moving the money to] will help you."
If you're uncertain of where to open a new account, start by talking to someone you trust. Ask friends or family members who they use. Also, review the offerings at the big mutual fund companies -- such as Vanguard, Fidelity, T. Rowe Price (TROW), Charles Schwab (SCHW) -- to get a sense for what's out there. And do your homework before turning to a broker, as they often charge higher fees.
3. Don't Be Afraid to Ask for Help:
Managing your employer-offered benefits can be difficult in the best of circumstances, and dealing with the added stress of a job loss can complicate things significantly. But there's a lot at stake -- not only in your retirement account, but also with your other benefits. It's important to understand your options.
"These transitions can be a lot more complicated than they first appear," says Hickey. "You have to ask: What about my life insurance coverage that I had for free with the company? What happens to the match in my 401(k)? Do I get paid for my unused sick leave? Often, there are many levels of compensation. If you sit down with a professional, they're going to call the employer and ask about the benefits and make sure you don't make a mistake."
If you do decide to consult a financial planner, a financial adviser, or one of the many other professionals available for hire, do your research here too in order to make sure you select one who's credible. "The marketplace is littered with people that say that they're planners, but they're not necessarily an expert in all areas. They just have 'planner' on the door," cautions Hickey.
4. Don't Cash It In! "One of the biggest mistakes I see all the time, especially today because people change jobs quite often, is the person moves from job A to job B and a lot of times they just cash in the 401(k) and pay the taxes or penalties to help with the transition," says Joseph Montanaro, a financial planner at USAA. "They lose momentum as far as getting into the habit of retirement saving."
His suggestion: "If they've got good options with the new employer, roll the old employer's plan into the new plan, or set up an IRA and roll the old employer's plan into the IRA, and that becomes the hub for retirement saving. But don't cash it in. It doesn't seem like very much if they have just a few thousand accumulated and few hundred in penalties and taxes, but it's more the fact that they've started to build this nest egg. Don't eradicate it."
5. Know Your Rights: You have various legal protections for your 401(k). For example, if you lost your job as part of a company-wide downsizing in which at least 20% of the workforce was laid off, then you are part of a "partial termination" of the 401(k) plan, and are considered fully vested. Additionally, if you have been forced into early retirement and are less than 59½ years old, you may be able to do a 72T distribution to access portions of your 401(k) without paying the 10% penalty usually levied on early withdraws. Spouses also have legal protections and in some cases may have a legal claim to a portion of the 401(k).
Next up, in part 3, I review how to create your own retirement account if you are unemployed, self-employed, or otherwise don't have access to one through an employer.