Guidelines for Participating in Employer Contribution Savings Programs
What guidelines are accepted for how to save/invest in company-contribution savings programs such as 401Ks when the person changes jobs every 2-5 years? Are strategies different than when you expect to invest in the same 401K (or similar vehicle) over 10-15 years? What do you need to know in terms of rolling savings from one employer plan to the next (or should you keep a bunch of pots going)?
I think such info is very pertinent for the young investor, who may not be taking advantage of an employer’s savings plan because they know they’re only going to be at a job for a couple years (or less) and think its not worth the hassle of investing, or don’t understand what the benefits are, even in the short term, of employer matches, etc. (Many of my friends are doing exactly this.)
Ancillary to this is that some young investors do take advantage of an employer savings program, but then don’t understand that it can roll into the new employer’s program, and thus the old employer “cashes out” and the investor gets a check for the remaining amount after those insane taxes. (This recently happened to my fiance with his 401K; his employer cashed it out before he could roll it. I check the mail, I never saw literature from the employer about rolling/transferring, so I am not even sure they gave him a heads up.)
In the changing job market, where permanency in a position is a thing of the past, understanding the level of fluidity in employer savings programs could be beneficial.
Alissa Genovese
Program Operations Specialist
Office of Research and Evaluation
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by Jerry Buchko
On August 9, 2010 at 5:28 pm
Hi Alissa,
Given that you posted this in May, I hope that you’ve been able to make some progress getting answers to your questions “off line” in the meantime. If you haven’t already done so, it might be particularly beneficial to talk with a financial planner. As I recall, we have at least a few AFCPE members who also have this particular financial training and experience and perhaps some of them have already reached out to you directly.
I’ve been thinking about your posting though from time to time over the last several months and trying to decide how I might answer these questions for myself as a practical exercise. Given that I’m starting with an understanding of my preferred investment approach (a benefit of consulting with a financial planner and a great deal of self study), I think I would generally attempt to utilize the options available to me that best met my needs at any given time. Put another way, I don’t think that I would change my fundamental investment approach or strategy, but I may need to use different tools at different times & circumstances to carry out that approach.
There are a lot of potential variables in the basic scenario you posed, i.e. a person who changes jobs every 2-5 yrs. For example, a future employer’s offering(s) in its 401(k)/403(b)/etc may be a particularly poor fit for my investment approach, or a future employer, especially a smaller one, may not even offer a pretax retirement savings program as a benefit. For these reasons, I would want to become informed about what options for pretax retirement savings would be available to me beyond what might be offered by a prospective employer.
There are a whole host of other variables or questions that might influence my decisions about where and how I would save towards my retirement. How much discretionary income do I have to commit towards retirement savings at different points of my career and life as circumstances change? Am I someone’s employee or a freelancer – or both? Am I single or have I started a family? Do I find keeping numerous accounts going manageable or is it a better fit for me to consolidate my holdings? These are just a few things that come readily to mind for me.
As for some information that might be helpful on the topic of rollovers, again, a consult with a qualified financial planner and/or tax accountant would probably be helpful. Personally, I did find this information provided by the IRS to be helpful as well given the kinds of questions I had.
* IRS.gov - Retirement Topics - Rollovers of Retirement Plan Distributions: http://www.irs.gov/retirement/participant/article/0,,id=211527,00.html
~ Jerry
Gerald Buchko, MA AFC | Financial Counselor & Personal Finance Coach | http://www.linkedin.com/in/jerrybuchko | jerry.buchko@gmail.com | @jerrybuchko