Why have 401k rollovers become so popular over the last few years? Well, since the 1980’s we have been blessed with retirement savings options that take into account our job flexibility and, thus portability. Gone are the days of 40 years with one company, getting a monthly pension and a gold watch upon reaching age 65. Americans have been able to accumulate over $5 trillion in defined contribution plans (profit sharing and 401k plans) according to the Investment Company Institute (“ICI”.) According to Fidelity Investments, the average 401k account balance in approximately $91,000 while the average IRA balance is approximately $92,000. However, the ICI has data that shows the average account balance of the “near retiree” (age 60 to 64) to be approximately $360,000. For many of us, the 401k plan is our largest asset, with the possible exception of our home equity.
So, what makes the 401k rollover so popular? One simple word: CONTROL. When we are in the company sponsored 401k, our investment options are limited. In many cases, the employer contribution to OUR retirement plan is in the stock of the company. You are given the option of investing in a menu of mutual funds or other investment products as selected by your employer. They must uphold their fiduciary duty and, consequently, end up limiting your choices. Better to be safe than sorry, so they think.
When you separate from service with the employer (i.e., quit, laid off, retire) you have the ability to take a distribution from the 401k plan of your entire account balance. This is what is known as a 401k rollover. You can have a check issued to you (be careful) or have a “direct rollover” into an IRA. If the 401k plan is handled by a large company like Fidelity, Schwab or Vanguard, they want you to set up an IRA with them. That may be an excellent move because it is simple and you may be able to keep your investment program intact. However, you have plenty of options. Remember, once you execute the 401k rollover YOU ARE IN CONTROL. You can probably find an investment adviser or a boutique trust company that would love to invest your ½ million dollars!
If you have taken the check for your 401k account balance you have 60 days in which to put it into an IRA rollover account. Otherwise, the amount you received will be treated as income and you will have to pay income tax on that amount. That can be very painful if you are unprepared.
It is highly recommended that you consolidate all of your employer sponsored retirement assets into one account. It is easier to manage and maintain one large account rather than several smaller accounts. You can have all of your previous 401k or profit sharing plans transferred directly into your new IRA rollover account. But do not commingle your regular IRA accounts with the monies from employer sponsored retirement plans. (More on that in a later blog.)
In summary, take full advantage of the retirement programs offered by your employer. Be sure to maximize the company match of your 401k salary deferral. When you leave the company, take the 401k account and put it into an IRA. Now, you are in CONTROL. Your options are virtually limitless and we can tell you more. Even if you do not possess the will, skill or time to invest this significant asset, there are many ways that are available to you. And, remember that this is the source of your retirement paycheck. You earned it!