Update:2/15/21

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Consideration for Managing Your 401k As You Switch Employers

As financial planners, we often have our first encounters with clients seeking assistance as a result of major life changes: marriage, children, inheritance, etc. Another common event that motivates people to seek financial guidance is changing employment. Changing jobs is a great time to take stock of your financial picture and reconsider how well you are positioned to achieve your longer- term goals. In addition to changing salary, with a new job there may be a relocation or new financial opportunities like severance packages, or stock and/or stock options in the new company.Unfortunately, individuals seem to increasingly be transitioning directly from one job to the next, and the transition planning opportunity is skipped over. The phenomenon seems to be particularly common among new clients we are seeing in the era of the pandemic. It is certainly understandable; in the stay-at-home culture of covid you can change jobs and still work out of the same office!Another common theme we are seeing among job changers is the tendency to leave behind a trail of one, or even more than one, 401k account(s).

While the money in the orphaned 401k is still yours, there are a number of reasons why this is inadvisable. Most apparently, there is a risk of losing track of the account or failing to integrate it into current financial plans as the years go by. Most orphaned 401ks are not managed, and so they may have investments that are no longer in sync with the rest of your portfolio. It is not uncommon for clients to come in with several 401ks from previous employers, each of which is small account with appropriate investments for its size, but when taken together, have a significant effect on the client’s risk exposure. In some cases it may be too much risk, in others the assets may be in cash and not growing at all.So, if nothing else, when you change employers and can no longer contribute to their 401k program, rollover your account into an IRA or other retirement plan vehicle that you can control and monitor. In thinking about this issue, I came across this old article on how to not get yourself into trouble rolling over your 401k, which is what got me to thinking about this phenomenon in general.1 The article summarizes a host of considerations to make if you distribute the money out of your 401k, and then contribute it back into an IRA. My thought: just don’t do it that way! Make arrangements to have the fund rolled over directly from your 401k to your IRA or similar vehicle so you don’t have to deal with those withholding and penalty headaches in the first place. And if you are unsure how to do it, consider getting a financial planner or other investment professional to assist you. Don’t forget, 401ks and IRAs were given the tax benefits they have because they are intended to constitute a major piece of your retirement plan; treat them with the respect that they deserve!

1https://www.nasdaq.com/articles/common-401k-rollover-mistakes-2010-07-21

Sincerely,

Jim, Mark, and Dave

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