Don’t Leave Your 401(k) Behind: What to do with Your Retirement Savings When Switching Jobs
By Chelsea Adams, PhD
Over the last several decades, there has been a shift in the labor market: the US economy has moved away from the standard of workers staying with one company for most of their career. Now, the average person will work for many companies across their working lives, jumping to new companies and jobs approximately every five years[i] in search of better pay and benefits, better work conditions, and more flexibility. These job changes have only been amplified in the pandemic’s Great Resignation.
In the career shift hustle and bustle, you may not immediately think of that 401(k) plan your previous employer offered, but it’s important to your retirement savings to remember it! So, what are the rules surrounding that money, and what happens to it when you switch careers?
Most companies who offer 401(k) or similar retirement plans for their employees have what is called a vesting period. When you contribute to a plan, your employer provides a matching contribution up to a certain percentage of your income contributed, and to keep that money, there are a number of days or years you have to work for the company in order to keep that money—the vesting period[ii]. This period, on average, is one to three years, although some plans are fully vested as of the day of first contribution. If you are past the vesting period, when you switch employers, all of the money contributed to the account—yours and your employer’s contributions—are yours to keep. If you are not fully vested, none or only a portion of the employer contributions are available to you. But the funds don’t automatically move with you when you move to a different employer.
When you move employers, your first step would be to see what their retirement benefit plan is, open an account, start contributing to it, and potentially take advantage of the employer contributions there. Then, decide if you want to move your previous retirement plan over to either your new 401(k) or to a non-employer sponsored plan you have. Why consolidate? There are a number of reasons to consider it:
- It gives you the potential to compound your investments faster.
What is compounding? When you earn interest on interest. With larger amounts of principal in an investment, you can more quickly build interest and compound that interest to grow your retirement savings, especially if that investment has a higher percentage dividend or interest payout. Compounded interest in your 401(k) is tax deferred, too, meaning you don’t pay taxes on earnings until you begin taking distributions from your retirement account. This allows you to participate in more market growth than you would if you had to pay taxes each year on your earnings.
- There may be investment options better suited to you in your new 401(k).
There are many different investment companies who offer 401(k) investment plans. Each plan will come with its own set of available investments, which can include proprietary funds from the company itself as well as a few mutual funds from other companies and target date funds. Some plans offer only a few investments; others offer a myriad of investments. Talk with your financial professional about the investment offerings you have available to you through your retirement accounts to see what the best options are for you.
- More or different services may be offered by a different investment company.
Many companies have value-added services that come with being a client, like retirement savings calculators or one-on-one investment guidance or advice from a financial professional. Others offer added investment services, like annuity contracts. Calling the company representative for your business retirement plan or setting up an online account to view available services will help you see what value-added services you might utilize through each retirement plan.
- Consolidation can help you get organized and lead to more financial confidence.
Perhaps the number one priority, knowing where your money is and how it is invested can lead to financial confidence. If you struggle to keep track of all those statements, accounts, and online portal passwords, it can be easiest to consolidate so you always know where your retirement funds are at and can manage them easier. It is better to consolidate than to leave money on the table because you’ve completely forgotten about it.
It is important to carefully consider these and other potential reasons for consolidating, as laws have recently changed and will require your financial professional to help you do an analysis of the two companies and give a reason for the 401(k) consolidation. Let’s work together to make sure you are on the right track for your retirement goals.
[i] Numbers are difficult to gauge based on what is considered a career change, and varies depending on gender, age, and race. See How Often Do People Change Jobs? (thebalancecareers.com) for more information.
[ii] It is wise to know how long it takes to be fully vested when considering job changes that have you leave a company so you don’t leave money on the table.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor and a separate entity from LPL Financial.
The Opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
Contributions may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.