Using a 401(k) or other employer-sponsored retirement plan is one of the best ways you can set aside money for your old age. But as many workers who've moved on from past jobs have recently discovered, employers don't want to keep footing the bill for their former employees' retirement savings. So they're kicking those accounts to the curb.
Until 2005, employers routinely cashed out small 401(k) plan accounts when workers quit. Previous law allowed them to sell 401(k) assets and send checks to workers who had less than $5,000 in their accounts, forcing the recipients to figure out on their own how to roll over those amounts into IRAs to avoid the extensive taxes and penalties that would otherwise apply.
Current law, however, only allows that option for workers with less than $1,000 in their accounts. For those with between $1,000 and $5,000, employers have to go to the trouble of setting up an IRA for their former employees.
Why Is That Bad?
In general, rolling over an old 401(k) to an IRA can be the smartest move you can make. That's because it gives you access to a wider range of investment options that are often less expensive. It also helps you avoid the tax hit of just depositing old 401(k) money into your regular bank account.
But for those with tiny account balances, those low-cost options are a lot harder to find. Without the clout that a large 401(k) plan brings, you won't get the same lucrative deals that many major employers can get, including low-cost institutional mutual funds and other favorable investments.
Two Ways to Deal With Being Dumped
If your former employer boots you out of your 401(k), realize that you have options.
If the IRA that your former employer sets up for you isn't what you want, you have the right to transfer that money to the provider of your choice. That way, you can pick a lower-cost IRA that meets your needs.
Alternatively, if you have a 401(k) account with your current employer, you can roll the IRA money into that account. That strategy works best if you like your current plan's investment options better than what you have access to elsewhere.
10 Reasons Why You're Not Feeling Better About the Economy
My Old Boss Kicked Me Out of My 401(k)! What Now?
Nationally, the average gas price hit a recent high of $3.74 per gallon, nearly $0.50 higher than it was on Jan. 1. According to website GasBuddy.com, that's about a 14 percent increase since the start of the year.
The start of the new year also marked the end of the temporary 2 percentage point tax break on Social Security contributions. Once that part of President Obama's stimulus package expired, your paychecks went back to being 2 percent smaller. For the average family, that adds up to about $1,000 a year.
That same "average family," by the way, already earns only about $50,000 a year today. And according to CNN, that's about $4,000 less than you were earning in 2000.
A disconcerting report from Sallie Mae last week showed that about one-third of Americans working toward retirement are having to raid their retirement savings to pay for their kids' college educations.
According to a poll commissioned by Bankrate.com (RATE) in February, only 55 percent of Americans have enough money tucked away in their savings accounts and "emergency funds" to cover the amounts owed on their credit cards.
That Bankrate poll also revealed that among women in particular, 51 percent actually owe more on their credit cards than they have cash in the bank. Digging deeper into the data, Bankrate reported that while high earners are doing well, and generally flush, most people (59 percent) who earn less than $30,000 annually owe more on their cards than they have in savings. And these are the people least able to afford the high cost of credit card interest.
Speaking of earnings -- and jobs -- the same unemployment report that set Wall Street to cheering Friday can be looked at from a glass half empty perspective as well. The new, lower unemployment level of 7.7 percent is the best number we've seen since the Great Recession ended. However, The Wall Street Journal points out that 7.7 percent is very close to the worst unemployment ever got (7.8 percent) in the 1991 recession. Our best number in years is within a whisker of the worst they faced back then.
The overall workforce participation rate -- the percentage of Americans currently earning wages at all -- currently stands at just 63.5 percent. According to the Bureau of Labor Statistics, that's much worse than what we saw in the 1991 recession. It's the lowest we've seen since the recession that hit during the Carter administration.
Little wonder, then, that according to the Bankrate survey, people are increasingly concerned about "job security." Friday's unemployment report may suggest that the jobs market is on the mend, but most people (59 percent) say they feel no more or less confident in their employment situation today than they did a year ago. Among those polled whose opinions have changed, 23 percent said they feel "less secure today" than they did a year ago, versus 19 percent who feel more secure.
That doesn't exactly jibe with the story that things are getting better.
It's great news for folks who own stocks, no doubt, and according to the Journal , more than 90 percent of people earning $100,000 or more do. But what about the rest of us? Fewer than 46 percent of Americans earning less than $50,000 are invested in the stock market -- and remember, "$50,000" is the average income in America today.
So yes, It turns out for the average American, things may not be getting better at all.