The average American changes jobs about once every three and a half years. That means that a person could easily switch jobs more than ten times over their career.
Even though 401(k) plans are touted as being “portable”, every job change is a potential loss of retirement benefits. And a woman that interrupts her career for parenting is further disadvantaged. Cumulatively these losses could be catastrophic to your retirement security even if you never lose a single day of work when changing jobs.
You can’t afford to lose out on retirement accumulation. You have to keep that money in play, working hard for your future. Fortunately, there are tactics to minimize the impact to your retirement planning.
First, let’s look at how these losses come about:
- Your old employer’s plan may call for you to be employed on the last day of the plan’s year in order to receive a contribution for that year.
- You may lose out previous years’ employer contributions to a defined contribution, 401(k), 403(b) profit sharing plan due to loss of time toward the vesting schedule. Some plans may provide for no vesting at all for company contributions until the completion of three years of service. Others can provide for graded vesting over time. (Of course, you are always vested in your own contributions.)
- You will have fewer years of service for defined benefit plans.
- Your new plan will normally require a period of time before you are eligible to enter the plan.
Another serious issue is “leakage” of retirement plan assets which occurs when an employee cashes out his retirement as he leaves his employer. Even with mandatory 20% withholding, ordinary income tax and a potential 10% penalty for premature withdrawal, far too many participants take the money and run. Rather than keep the money hard at work in a tax deferred plan, employees that fail to roll over their termination benefits systematically loot their future economic security.
Finally, some employees make no election and their funds remain in the old employer’s plan. This might work out OK, but more likely will result in multiple unmanaged orphan accounts with no coherent investment strategy and potentially higher costs. (See Smart Moves for Your Pension Plan for a complete discussion of alternatives.)
None of this bodes well for a successful, prosperous and secure retirement. So, you will need an active strategy to minimize the disruption to your retirement plan accumulation.
If possible, time your exit to maximize your vesting, years of credited service, and accruals. It is surprising what a huge difference a day or two at the end of a plan year can make to your benefits.
Unless you have a severe financial crisis, preserve your qualified plan assets inside a tax sheltered vehicle that you can effectively, economically, conveniently and efficiently manage. Whether you keep your funds in the old employer’s plan, roll them into the new, or consolidate them into an IRA, your goal should be wide diversification, low cost, and a tailored solution that meets your needs. You have to keep those funds at work for your future security.
Not being covered by a plan is not an excuse to stop saving. There are plenty of alternatives to pension plans for transitioning workers. If you have a period of time where you are not covered by a plan, contribute to IRA’s, Spousal IRA’s or a tax efficient brokerage account.
If you are being recruited, always negotiate to make up for lost benefits. It can’t hurt to ask, and your new employer may be much more sympathetic than you imagine.