Don’t Resign Your 401K During “The Great Resignation”

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Blooom CEO with advice for workers at a crossroads

Long gone are the days when the average American worker spends their entire career clocking in and out at the same employer. The modern workforce is notorious for embracing change, adopting and growing new skill sets, and jumping from job to job every few years. To that end, 401(k)’s are on the move, as well. Or in some cases, not “moving” at all.

Chris Costello, 401K/retirement industry expert and CEO/Co-Founder of blooom, cites a recent study by Capitalize that found roughly $1.35 trillion (yes, with a “T”) of retirement assets just sitting ignored in the abandoned or forgotten 401(k) accounts of an estimated 24 million American workers. blooom has reviewed thousands of employee sponsored plans and as a neutral 3rd party can give critical unbiased feedback on retirement options.

“This issue likely stems from the increasing frequency of job changes and the “out of sight, out of mind” nature of the 401(k) in general,” says Costello. “Many workers may not even know they do indeed have options when it comes to their 401(k), even after they leave the employer that provided it. If you’re someone that’s recently changed jobs or is thinking about doing so soon, what can you do to avoid becoming an unfortunate statistic? First and foremost, know that you have several options in nearly all cases.”

Leave it where it is, but that doesn’t mean neglect it!
The important thing is not forgetting about it and making sure it’s invested appropriately. We’ve heard plenty of examples of old forgotten 401(k)s that sit uninvested in a Money Market fund (cash equivalent) for decades, missing out on the power of compound growth. Don’t let that be yours!

Pros:

  • Less work.
  • It may be a far better plan than your current employer’s, with great investment options and low fees.

Cons:

  • Easy to forget about.
  • Another account to worry about and manage.
  • Fees may be high.
  • Fund choices may be poor and/or expensive.

Bring your old 401k along with you
If your new employer offers a 401k, chances are the new plan will allow you to rollover, or transfer, your old 401k into it. This type of transaction is direct from one institution to another and avoids tax withholding and penalties, if done correctly. It might sound intimidating, and the process itself often differs from plan to plan, but your new employer or plan administrator should be able to help get the ball rolling.

Pros:

  • Consolidating accounts into one keeps managing your retirement assets simple, both now and in the future.
  • Low risk of that old account sitting uninvested or invested inappropriately for your goals.
  • Potentially lower plan and fund-related fees.

Cons:

  • Your new plan may not be as good as your old one. For example, it might have high administrative fees + high fund fees.
  • You may have other investment accounts at the old plan’s institution anyway and like that institution, making it less likely that you'll forget about it.
  • Your new plan may not allow 401k rollovers.

Rollover your old 401k to an IRA
The benefits of a 401k tend to outweigh this when you’re contributing to the plan, but 401ks are well-known for being expensive to maintain. And those costs may get passed onto participants in the form of administrative fees, along with the fees associated with each individual investment option the plan offers to participants.

Once you leave an employer and are no longer eligible to contribute to the plan and receive any match they may have offered as well, it may make sense to consider transferring the account to an IRA, through an IRA rollover. Some IRA providers charge no fees to open and maintain an account with their specified minimum. Most of the top institutions also will offer access to no-commission, no-transaction fee, low-cost index funds. While this may still leave you with the same number of accounts to manage, it also may save you in hidden fees over your investing lifetime.

Pros:

  • Could potentially reduce hidden fees on your investments.
  • When the time comes to take distributions for retirement, setting up those distributions from one place is easier than needing to do so from multiple different sources.
  • Control over your investment options and strategy, depending on the institution.

Cons:

  • IRAs are more limited when it comes to access to penalty-free withdrawals, when compared to a 401k account
  • Inability to take a loan from an IRA account, unlike a 401k
  • In some circumstances RMDs (required minimum distributions) can be delayed in a 401k, if you’re still working. This is not the case with an IRA.
  • While both IRAs and 401ks are protected assets under Federal law when it comes to bankruptcy and lawsuits, some state laws may not offer the same protections to IRAs.
  • If you hold employer stock in your old 401k, there may be tax consequences to moving that to an IRA. You should consider talking to a tax professional beforehand.
  • As an individual investor you may not have the same ability as a larger company does when it comes to negotiating better investment fees for their participants.

Cash it out
Rarely would this be something blooom would recommend, but yes, you can just take the money out of the old account when you leave your employer. But unless you have a true financial hardship and no other available liquid assets, this should be the furthest thing from your mind.

The main downside, at least immediately, is taxes. Taking a cash withdrawal from a retirement account will mean owing income tax on any pre-tax portion of the account, along with a 10% penalty on the withdrawal, regardless of Roth or Pre-Tax, if you’re under age 59.5.

And of course the greatest negative impact in the long-run comes from the opportunity cost of no longer having that money invested and able to compound in the market and grow your wealth over time.

There is no one-size-fits-all solution
We wish we could tell you there’s always one single approach to this that works best, but like so many aspects of personal finance, the best decision for you is truly personal to you and your situation.

If you’re having trouble weighing your options, comparing your old and new 401k accounts, or just want to make sure you’re considering everything you need to, please reach out to our advisors! We have a team that’s ready to help you make the decision that’s truly best for you.

The information is provided for discussion purposes only and should not be considered as advice for your investments. Blooom does not provide tax advice. Consult a tax expert for tax-specific questions.

About Blooom
Blooom is a digital financial management service bringing affordable retirement advice to the masses. The retirement analysis is complimentary. Connect your IRA, 401k, 403b, 401a, 457 or TSP today for a free check-up of your investments.

About Chris Costello
Chris Costello is the CEO and Co-Founder of blooom - one of the nation’s fastest growing robo-advisors aimed at helping millions of underserved retirement savers. Chris has earned the prestigious CERTIFIED FINANCIAL PLANNER™ designation and has been working with individual clients and building portfolio allocations for over two decades. Chris has personally coached people through the ups and downs of the market including the dot.com crash and financial crisis.

Prior to blooom he co-founded another investment advisory firm that grew to manage over $500 million for clients. At blooom, Chris leads the company in building innovative financial services to reach all under-served Americans. Blooom has been named one of the world’s most innovative companies by Fast Company, and Chris was selected as one of the "Ten to Watch in 2016" by WealthManagement.

Data for Archive:

Capitalize Report: https://www.hicapitalize.com/resources/the-true-cost-of-forgotten-401ks/
Internal data: https://docs.google.com/spreadsheets/d/1tnKzUON17EAyEFgxd-1gr_R89OhtCj-2rR_awy30GXw/edit?usp=sharing

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Elliott Scott
Will Gregory Public Relations
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