How to Handle a 401k When You Change Jobs
When starting a new job, there’s a lot to think about. There are new responsibilities, new processes, new people - and, most likely, there’s also a new 401k plan to consider.
Even as you sort out your new tasks and work environment, it’s important to make your retirement plan a priority.
Timing is everything, and when changing jobs you have a lot of options that could help you to streamline your retirement plan and investments.
Here’s how to handle the transition from one 401k plan to another.
Questions to Ask About Your New Employer’s Plan
Employers typically include 401(k) plan information in a new hire package. You should get a letter outlining the specifics of your company’s plan, and maybe a brochure with investment options and other details. Most 401(k) providers have websites that will walk you through an introduction. Take a few minutes to skim and read the details and get to know a little bit about the plan.
Look for answers to the following questions, when reviewing the plan details:
Is there an employer matching program? More than 95 percent of large U.S. companies match the contributions that employees make to a 401(k). The average employer contribution amount is 4.5 percent of salary; some companies contribute up to 6 percent. Think of it as a 6 percent, tax-free bonus and you get why an employer match is not a benefit to be missed.
What’s the vesting schedule? Many employers offer a vested match, which means that although the company is contributing up to 6 percent of your match, your access to that money is given on a timeline. After year one or two, you get 25 percent of the money, then 50 percent, until you receive the full 100 match after five or more years.
Getting started on a vesting schedule is one of the reasons it’s important to sign up for the 401(k) as soon as you can. You’ll optimize the funds the company matches if you enroll at the earliest possible date.
What types of investment options does the plan have? There are financial professionals who would argue that a portfolio with one or two broad-market, low-fee index funds (e.g., a Standard & Poor’s 500 fund) is enough for most young savers. But it’s still nice to have options to choose from. You can look up each fund offering on a site like Morningstar. The site offers star ratings for each fund, but those do not tell the whole story. Look at the investment style box to see if it fits your own (for example: are you looking for aggressive growth, or afraid to risk losing money?).
When comparing two fund choices, look to the fees and expenses. And if you opt for a target-date retirement fund or lifecycle fund that does the asset allocation for you, there’s no need to invest in anything else.
How Much Should You Save in Your 401(k)?
Some experts recommend that individuals save 10 percent to 15 percent of pre-tax salary for retirement. Others simply advise saving as much as you possibly can. A good rule of thumb for starters is to save at least what your employer will match. Anything less and you are leaving money on the table. If your employer will match it, save up to 6 percent with the goal of working your way up to 10 percent and beyond.
If the new job represents a jump in salary for you, consider increasing your contribution amount.
As you continue to rise up the corporate ladder and earn more, try to increase the amount you put away in your plan. If you shift 1 to 2 percent every few years, you’ll hardly notice the difference.
What to Do With Your Old 401(k)
Many 401k plans offer the ability to move money from a former employer’s 401(k) into a new plan. If you like your new employer’s plan, it makes sense to combine accounts and reduce your total amount of investments and fees.
Moving Your Old 401(k) to the New Plan
The information on how to move the former 401(k) should be included in your new plan’s sign-up package, or you can ask the plan sponsor directly. Once you cash out of one plan, you only have 90 days or less to get it the assets into the new plan, otherwise it will be considered a taxable distribution.
The funds should ideally be transferred directly from one company to the next. If you get a check mailed to you personally, do not cash it. Contact the new plan manager to find out how to transfer the assets correctly.
If you don’t particularly like the new employer’s plan, it’s still worth saving there to get the opportunity to invest pre-tax dollars and take advantage of the employer matching funds.
Move Your Old 401(k) to a Rollover IRA
But your old 401(k) doesn’t have to be part of the new plan. Instead, you can move the money into a rollover individual retirement account (IRA). Think of a rollover IRA as a catch-all account that combines all the assets from the 401(k)s you leave behind. With a rollover IRA, you can choose from a huge selection of investments, and the money continues to grow tax-deferred until retirement.
That takes care of the 401(k). Now to find the good lunch places in your new office neighborhood.