In the last thirty-six months, the United States unemployment rate has snowballed from a stable five percent to over nine percent in total. It’s a startling figure, and one that’s resulted in the loss of large amounts of income for thousands of US families. Hundreds of thousands of former success stories are in positions of limited long-term financial outlook, and thousands more are likely to join them.
In situations like this, it’s difficult to know how your long-term financial planning will pan out. The vast majority of professionals fail to plan for recessions and involuntary redundancies, leaving their retirement investments in employer-backed 401k accounts and other long-term funds. While it may seem like all hope is over for these investments, the reality is that it’s fairly easy to recover them.
The 401k account is one of the most popular forms of retirement financial planning for American professionals, having been opted into en masse since the early 1980s. Over the last thirty years it’s gone from a moderately popular retirement savings strategy into the most popular in the country – as of 2011, sixty percent of all American households with middle-aged parents had a 401k account.
Despite some shortfalls, many of which have been reported on extensively during the last decade, a growing number of households still opt for a 401k plan for their retirements. But what happens if an employer lets you go? What happens if the economy forces you out of your job? What happens if it no longer becomes realistic to work due to a decrease in demand, an injury, or a workplace lawsuit?
The answer, for the vast majority of 401k account holders, is to perform a ‘401k rollover’ and use your existing 401k savings as the basis of a new retirement planning account, all without the ever-common burden of transfer expenses and fees. This allows account holders to access a collection of benefits that would be made unavailable should they withdraw from their 401k before transferring.
There are several options available for households and professionals looking to ‘roll over’ their 401k into a new account. These include the employer-based rollover, which involves transferring into the retirement account set up by a new employer, and the IRA-based rollover, which requires that your 401k is transferred into an individual IRA account. These options are both discussed in detail below.
In the event that you’re offered a job with an employer that uses 401k retirement plans, you might be able to roll your current 401k plan over to your new employer. This is a fairly simple process – your account is simply transferred to the new employer’s 401k plan, which is subsequently used as an operating basis for new investments. Generally speaking, there is no minimum balance for this.
Is this the best option for you? If you’re uninterested in managing your own 401k, then rolling it over into a new employer-based plan is an intelligent option. The fund will be managed for you, with your investment cared for under the guidelines of the plan itself. This offers low flexibility, although the simplicity of this investment option makes it popular amongst most employees.
The second option, of which there are two variations, is to roll your 401k over into an IRA, either a brokerage-backed IRA or a mutual fund-backed IRA account. This allows your retirement savings a great deal more flexibility, particularly in the type of investments that can be made with them. Most 401ks offer limited investments in stocks and index funds, while mutual funds offer greater variety.
This includes ETF investments – exchange traded funds – and individual stocks and bonds, all of which are considered ‘out of bonds’ under an employer-sponsored 401k. Using a brokerage-based account, you can select the exact type of investments that are made using your retirement savings. This allows you to effectively limit or extend the amount of investment risk you’re willing to take on.
The alternative, a mutual fund-based IRA, offers slightly less investment flexibility, albeit with a substantial decrease in costs. As a brokerage account is tied to an individual broker, every sale, no matter how small or significant, is charged and individual fee. When several small investments are made in close succession, this can result in hefty compounded fees and a limited return as a result.
Generally speaking, all of these rollover options are fairly simple to execute, with most able to be streamlined and prioritized through your current 401k provider. It’s generally a case of filing forms to begin the rollover process, and later authorize the retirement savings to transfer from your older 401k account – one that’s held with the terminated employer – into your newer 401k or IRA.
There’s a question on every former employee’s mind throughout this process, and it’s one that’s very difficult to answer. Which one is best for me? With three key options available, two of which use an individual IRA rather than a standard 401k, it can seem difficult to choose. If you feel uncertain, it’s best to speak with a financial advisor – they can assist you in planning well for your retirement.
However, all three of these options offer a relatively low-risk, potentially rewarding way to prepare effectively for your retirement years. From employer-sponsored 401ks to rewarding individual IRA accounts, there’s always an option out there to suit you. Finding that option, however, might take a great deal more thought, planning, and introspection than many ex-employers expect it to.