Quitting a job can be one of the most difficult decisions a person can make in their professional life. For most people, it requires a leap of faith and hope that life’s next chapter will provide more opportunity, enjoyment, cash, or a combination of the three. Once you’ve made the decision to leave, there are a few items to pay close attention to as you make the transition to your next employer. This post looks at three important retirement considerations before you give your boss the peace sign.
Wait Until You Are Fully Vested (if possible)
You might hear the term “vested” thrown around a lot by your Human Resources person every now and again. In simple terms, being vested means that you’ve stayed long enough at your job to keep all of the employer 401k match. If your company doesn’t match funds, you may skip to the next section, as there will be no company contribution to worry about.
If you’re confused about vesting, let me give you an example.
At my last job, my company would match EVERY DOLLAR I contributed to my retirement plan up to 6% of my total salary. This means if I put $1 into my 401k, the company would also add $1. Not a bad deal, it’s free money. The only catch is that in order to actually keep that extra money, I would have to stay for at least 4 years. If I quit after 3 years and 6 months, I’d only keep a percentage of the amount my company kicked in (in my case, I kept 75%). I would never lose the money that I contributed, I just wouldn’t get to keep all of the “extra” my company put in on my behalf.
So before you turn in your two-weeks’ notice, make sure that you’re fully aware of any money that you’re leaving behind. Every dollar counts, and leaving a few thousand on the table can have the ability to really add up down the road. I would hate for someone to quit a few weeks before they’re fully vested. If your future employer is anxious for you to start soon, it won’t hurt to let them know that you’d like to wait a little longer in order to hit your fully- vested mark. Most HR folks are reasonable people.
Owning Company Stock…Be Careful
This section is about not putting all of your eggs in one basket…especially if that basket is your retirement fund. In case you are unfamiliar with the Enron story, let me give you a quick reminder. See chart below.
There are dozens of stories about people literally putting 100% of their 401k in company stock. While this might seem savvy during your company’s boom times, remember that very few individual stocks go up (and up and up) forever. It’s important to spread your risk around.
When quitting your job, it might be easy to forget about what funds and stocks you have accumulated in your retirement account. I would urge you to take a look and make sure you’re not overly-weighted towards your former company’s stock. There aren’t any official rules for how much is too much company stock, but I wouldn’t put more than 10% of my 401k in any one company’s shares. While markets are still relatively high, it wouldn’t hurt to talk to your HR or benefits personnel about selling a little bit of stock and diversifying your assets. You’d feel sick if you realized that your first company out of college went bankrupt and you had 50% of your retirement contributions going toward a stock that is worthless. Again, see Enron chart above.
Rolling Over Your 401k Versus Leaving it at Your Old Company
If you remember nothing from this section, please remember that it is almost always a bad idea to cash out your 401k. Unless you have some sort of extenuating circumstance, you’ll most likely regret this decision for life. You’ll get hit with a huge tax bill and have to pay an early withdrawal penalty.
When starting a new job, there are two major options:
1) Leave your 401k at your old employer
2) Roll your old 401k over to an IRA
Note: A third option would be to roll your 401k over to your retirement account at your new company. A lot of companies don’t allow this so I won’t discuss it. Email me if you want to know more.
Leaving your 401k with your old employer
There isn’t anything wrong with this option. Check with your benefits person, but there usually isn’t any urgency to move this money. If the funds you’ve been participating in are inexpensive (look for something called the expense ratio, inexpensive is 1.2% or less) and you’re happy with your asset allocation (meaning you have a decent mix of stocks and bonds, some domestic, some international) then you have my blessing to leave your 401k at your old job.
What happens if my old company goes out of business or gets bought?
This is a common question. Remember that your company doesn’t actually “own” your 401k and the assets in your account can’t be used to pay your company’s bills or debt. Your funds are held by a custodian such as Vanguard, Fidelity, Progressive, etc, etc. These companies are simply the ones looking after the account and offering different funds…you are the owner.
Most people will change jobs 6 or more times in their life. If you choose to leave your 401k at your old employer, just don’t forget about! Trust me. It happens.
Rolling Your 401k Over to an IRA
If you prefer the convenience of having all of your accounts in one place as you change jobs, this is the option for you! Companies like Vanguard offer a wide variety of low-cost, easy-to-understand funds. Keep in mind that the company you roll your account into might not offer the exact same funds as you’ve been used to. That’s OK. You just might not be able to add more money to those particular funds. That’s OK too. Your goal should be to regularly contribute to the 401k at your new company and each time you switch jobs, move your 401k to your IRA. Your old funds will continue to grow even if you don’t add money to them. It’s just easy to pool everything in one account as you switch companies.
There are several steps to this process, but I’ll give you the main points:
1) Call your HR or benefits department and let them know you’re interested in rolling over your account. They’ll provide you with documentation such as account numbers, addresses, and phone numbers of your current 401k provider.
2) Once you’ve obtained this information, call a financial services company (I like Vanguard as you can tell) and let them know you’re interested in an IRA rollover. They’ll give you a few forms to fill out and might even let you complete most of this over the phone. Just make sure you have your old account information handy.
3) That’s it. These transactions are becoming so common that most companies have this process down to a science.
As I highlighted in my last post, whether you’re going back to school or joining a different company, think long and hard before actually making the move. If you decide that making a change is in your best interest, be sure to pay attention to what’s going on with your retirement funds. If you can’t have a 30 second conversation with someone about the type of funds you’re in, spend a little time taking a look. If you get confused, don’t hesitate to shoot me an email. Remember that I’m not any type of financial advisor, just a guy who likes this stuff.
What are your thoughts on 401ks and rollovers?