Personal Finance

Switching jobs? Don't forget that 401(k) plan

Key Points
  • Starting a 401(k) is a popular option for those beginning to save for retirement.
  • Many are uninformed about the steps in transferring old 401(k) plans, which could lead to missed opportunities for generating more savings.
  • Leaving your 401(k), cashing it out, rolling your account into a rollover IRA or a new 401(k) are the most popular options; however, some methods are more recommended than others.
How to maximize employer benefits
How to maximize employer benefits

Starting a 401(k) plan is the most popular way for many in the workforce to grow their nest egg for retirement.

Whether you're a millennial thinking about moving from one job to another, or a veteran of the workforce making a career change, financial experts say it's key to know your options when it comes to the 401(k) plan you've set up with the employer you're leaving.

Some workers just leave the money in their former firm's 401(k) plan.

This option is recommended for people who are not savvy about 401(k) investments and are trying to avoid making a rash decision. However, a decision about where to move the 401(k) should be made within six months, according to certified financial planner Rianka Dorsainvil, the founder of fee-only financial planning firm Your Greatest Contribution.

For his part, CFP Jeff Rose, CEO of Alliance Wealth Management, notes that "too many people leave it at the old plan, which is OK [in the] interim."

If you've never had to pick your own investments and you're opening an IRA, there's a learning curve.
Jeff Rose
CEO of Alliance Wealth Management

"But often what happens is that they forget about it because they're not adding to it and it just stays at the old account," he said." It's out of sight, out of mind.

"If it's something you don't check frequently, it could be losing value or it could be investing in the wrong thing," Rose added. "Therefore, it's a horrible long-term solution."

There may also be hidden fees associated with previous 401(k) plans that an employee may not know of when they leave it behind to pursue a new position, said Sophia Bera, CFP and founder of Gen Y Planning.

"It's important to look at the fees because sometimes you don't know all the fees while you were at that job," Bera said. "Your previous employer probably covered the fees while you were working companies and may sneak in fees now that you're not employed there."

For those entering into a position at a nonprofit organization or a company where a 401(k) plan is not implemented, Dorsainvil of Your Greatest Contribution suggests that they should move their former 401(k) plan into an individual retirement account.

Hinterhaus Productions | Getty Images

An additional benefit is not being required to pay taxes when moving into an IRA since both 401(k) plans and IRAs are funded with pre-tax dollars, Bera said.

While this may be an ideal option for some, those who have little experience or interest in investing may find it overwhelming in keeping track and maintaining an IRA. However, Rose at Alliance Wealth Management still believes it could provide a learning opportunity that the other options don't necessarily offer.

"If you've never had to pick your own investments and you're opening an IRA, there's a learning curve," Rose said, adding that he prefers that option — even for those account holders who don't have a financial advisor to consult. While 401(k) plans are relatively easy to set up, usually with online or human resources help at work, when you opening your own IRA "you have more invested interest, learn a little bit more and put more time into it," he said.

Depending on the new job you're starting, you can also transfer funds from your old plan into a new 401(k) plan. Financial advisors suggest that getting a direct rollover could be ideal and to ask the human resources department at your new job for additional guidance and paper work for a seamless transition.

More in Personal Finance:
The US trails Europe in retirement security
Why high 401(k) plan fees are here to stay
Like hefty tax bills? Stick with your old 401(k) plan

However, Dorsainvil of Your Greatest Contribution stressed that employees should be sure ot check the "expense ratios" — or service fees — of new plans.

"I've seen some 401(k) expense ratios at 1 percent, which is really high," Dorsainvil said, adding that ideal expense ratios should be under 0.4 percent, to minimize the hit on the interest account holders should be earning. "When rolling over 401(k) plans, our best friend is compounding interest," she added. "If you can grow your nest egg with new contributions, this would be the best bet for you."

Some people are looking to just cash out the 401(k) plan. If you're under 59½, you'll have to pay additional taxes on the proceeds and a 10 percent early withdrawal penalty.

This option may be ideal for those trying to pay off short-term debt, but Bera of Gen Y Planning says it's an option most people should try to avoid since workers could be missing out on long-term benefits.

The check you're cut "ends up only being a portion of what you originally withdrew, along with the fact that the money didn't have time to grow," she said. "It's worth considering rollover options because it's helpful to look at how much that investment would be worth."

Are these hidden fees taking a bite out of your 401(k)?
Are these hidden fees taking a bite out of your 401(k)?

Bera suggests considering the often-overlooked Roth IRA — great for those in a lower tax bracket — as a rollover option. "If you are in the 15 percent tax bracket and expecting to move into a higher tax bracket later on, I'd highly encourage you to do Roth IRA because you'll be paying 15 percent taxes [now] and moving into a higher tax bracket later on," she said.

With Roth IRAs, the account can grow tax-free — after you fork over the initial tax on the opening balance you roll over from a 401(k) — meaning that when you eventually withdraw for retirement, you won't need to pay taxes on your contributions or the resulting earnings.

For those who are looking for ways to be a bit more savvy when it comes to managing 401(k) plans or preparing for retirement, Dorsainvil at Your Greatest Contribution suggests consulting financial management websites such as NerdWallet or your HR department. She also suggests seeking a financial professional to help guide you.

"Several HR departments are partnering with financial planner organizations," Dorsainvil said. "Some offer those consultations for free, or at a reduced cost for employees in order to touch base with a financial planner. Workers should see whether that lies in their benefits for the company."