What is more devastating to your 401K plan?
- Taking a loan from your 401K account
- Cashing out when switching jobs and paying taxes and penalties
It has been debated over the years, but we now have an answer. Studies by the EBRI (Employee Benefit Research Institute) points out there are cases where two-thirds of the reduction in retirement saving is due to the latter. I have encouraged employers to not create a loan provision when creating a company 401K plan. Even though research shows that by removing this provision form a 401K, it is in the best long term interest of the employees. Employees on the other hand love this addition. There are some who would be reluctant to participate in a 401K plan unless a loan provision was present.
When switching jobs, 67% with #401Ks <$5K will spend it simply because they think it easier https://t.co/kQS8Iwe9vo pic.twitter.com/HPIKwszR5u
— Isaac R. Allen, CFP® (@IFAdvice) August 15, 2016
Back when employees had pensions to fall back on during retirement they did not have to worry about how to manage their pension. The employer had this obligation. But now, most employers are going with a defined contribution (DC) plan such as a 401(k). With the advent of 401(k) plans the onerous task of managing retirement savings plans has moved the employee. Many employees are ill equipped to be able to handle this management. Case in point is when they switch jobs. The recent study by the EBRI revealed that 67% of employees with 401(k)s of less than $5,000 would spend the money instead of rolling the funds over. This represents about 5 million working Americans a year. They would rather spend the money and pay early withdrawal penalties and taxes, not because they need the money, but because they feel it is easier. This is a surprising result, considering they have solutions of rolling their previous 401(k) over to their new employers’ 401(k). If this option is not available to them, they can open a Rollover IRA.
This study by the EBRI is focused only the employees with small 401(k)s (less than $5,000). If employees are this nonchalant with less they $5000 how are they handling and managing the average 401(k) of $91,300. Employees should make sure they are doing the right thing by the retirement savings.
The employee is left holding the proverbial bag. This type of poor retirement saving plan management is what is hurting many employees. I encourage you to be come in formed of your options when switching jobs. The fact that 401(k)s are portable is a great thing if used wisely. If not, then it can have employees wondering why they are so ill prepared for retirement.
Do you have a 401(k) from a previous job that you are not managing?
Author
Isaac is a Fee-Only (no products sold) Certified Financial Planner® Practitioner. Isaac founded Stalwart Financial Planning with offices in Fayetteville NC and Durham NC. Isaac provides comprehensive planning and investment management services to individuals from all walks of life. Isaac can be reached by phone at 910-867-8464, or by email (iallen@StalwartPlanning.com). Visit him at Stawart Financial Planning www.StalwartPlanning.com.