Taking your retirement-plan money when you switch jobs and going on a spending spree would be a costly mistake, resulting in higher taxes, penalties, and lost investment opportunities. But even if you know enough not to treat your retirement account as a windfall, it's hard to get good advice on what to do with it instead.
Back in March, the Government Accountability Office took a close look at how workers handle 401(k) retirement plans when switching jobs. What the GAO's study found was that while the current process has a bias toward pushing workers toward rolling that retirement savings into IRAs, people often overlook another option: moving their retirement assets to your new employer's 401(k) plan.
Let's take a closer look at the options you have and which one makes the most sense in your situation.
When you switch jobs, you'll typically have three options of what to do with the money in your employer-sponsored retirement savings account.
You can roll it over into an individual IRA at the financial institution of your choice.
If your new employer offers a 401(k) plan, then you can transfer the assets into your new employer's plan.
And lastly, if you have enough money to satisfy your existing plan's minimum account balance for former employees -- usually $5,000 -- you can keep your money in your old employer's 401(k).
The GAO found several pieces of evidence pointing to the tendency to push former employees toward IRAs. IRA providers tend to be more aggressive in seeking rollover business, as nine of the 10 providers the GAO reviewed advertised the fact that they offer assistance to workers wanting to roll over old retirement assets. New-account bonus payments of as much as $2,500 helped provide even greater incentives to choose an IRA.
By contrast, the number of people using plan-to-plan rollovers is much smaller, with the GAO pointing to one plan sponsor that reported about 10 to 15 percent of participants moving their retirement savings to new-employer 401(k)s.
With the need to coordinate paperwork for both sets of plan administrators, workers found it far more difficult to get through the obstacles to getting their old retirement money into their 401(k) account at their new employer.
When a 401(k)-to-401(k) Transfer Makes Sense
Cost is a key component of choosing a retirement-savings option, and some 401(k) plans charge higher fees than you'd get by selecting a low-cost IRA investment. But in some cases, sticking with a low-cost 401(k) makes more sense than picking an IRA.
Many employers foot the bill for administrative and record keeping fees and offer low-cost institutional-class mutual funds among their investment choices, providing annual savings over the mutual fund shares more readily accessible to ordinary investors.
For less sophisticated investors, the security of having a plan administrator who bears fiduciary responsibility under retirement-plan law for the investment choices a 401(k) plan offers can be helpful. Although that responsibility hasn't led all plans to have the best possible investment options, it does provide remedies that aren't available to those who invest in IRAs. And, although IRA providers tout the advantages of flexible investing strategies, those who don't know much about investing aren't in a position to make maximum use of that flexibility.
Consider All of Your Options
The GAO study serves as a good reminder that a rollover IRA isn't your only option when it comes to considering retirement-savings options.
If your new employer offers a high-quality plan with low-cost investment options, your best bet will often be to roll your old retirement savings into that plan, despite the administrative challenges you might face in doing so.
7 Top Money Tips from Scott Gamm
The Smart 401(k) Rollover Option That Almost Everyone Forgets
The only way you should be using a credit card is by paying off the entire balance every month –– no matter what your minimum balance says. By paying the minimum payment, you'll wind up leaving a balance on the card and your interest rate will kick in. Minimum payments are calculated to keep you in debt. Ignore the minimum and pay the entire balance, or at least as much of it as you can.
You're young and you're just starting to build up you credit history. So use credit as a useful tool to get there –– not as a free pass for a fancy lifestyle. Do that by picking one or two small expenses each month to charge on your credit card. And try to keep your spending under $100 per month. That's at least a manageable amount of money to be able to pay off the bill in full. A good rule of thumb: Never spend more than you earn.
If you're looking to build up a solid credit history, you won't have any luck by signing up for a prepaid debit card. Why? Because none of the activity on a prepaid card is reported to the three credit bureaus (Experian, Equifax and TransUnion). Plus, you're going to get slammed with fees on prepaid cards like monthly fees, dormancy fees and, get this, a fee just to load money onto the card –– that's the entire point of a prepaid card!
The days of free checking are disappearing. And unless you maintain the bank's minimum balance requirement, which can be $1,000 to $1,500, you're throwing away $10 to $12 per month. If you've been charged this fee before, consider switching to an online bank or a credit union. You'll find there are either no or fewer fees to deal with.
When you get an email from your favorite store letting you know they're having a sale, this reminds you to head over to the store. If you hadn't received that email, the store wouldn't have even been on your mind. Unsubscribe. The same goes for those daily deal sites – unless you're in the market for something specific (a trip to Europe, new shoes or a restaurant deal), being reminded of random flash sales is a sure-fire way to start spending beyond control.
Most of us are too scared to ask for a higher salary. But if you don't, you're leaving money on the table. Negotiating on your first job out of college might be a tad risky, but don't feel afraid to ask for more money on future job offers. Plus, negotiating reflects persistence and that "stop at nothing" attitude that employers expect. Do some research in your field to find out what someone at your level is earning, so you'll know whether to ask for more during the hiring process.
If your employer contributes to your 401(k) (a retirement account that lets you automatically contribute a portion of each paycheck), then you should contribute, too – up to the employer's match. If you don't, you're basically throwing away free money. If they don't contribute anything, you might be better off going a different route.
The fees are exorbitant (employers hire large asset managers to take care of the employee's 401(k) accounts, and that isn't free). In fact, a survey last year from Demos showed that on average, a couple could spend $155,000 in 401(k) fees over a lifetime. Instead, take ten minutes and open up a Roth IRA online from a discount brokerage firm. This is an account where you contribute money that you've already paid taxes on and your money will grow tax-free. Who knows where tax rates are headed (probably up), so get the taxes over with now.