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November 04, 2007 at 02:00 PM
Take it. Leave it. Roll it. These are the options employees have regarding their employer-sponsored retirement plan (ESRP) assets when they leave one company for another. Each option has consequences, and making the wrong choice could have significant impact on retirement savings goals.
ESRP assets typically account for the greatest percentage of one’s retirement savings. On average, affluent Americans have $260,000 invested in a former ESRP, according to the 2007 Investor Brandscape study of 4,000 affluent Americans by Cogent Research, Cambridge, Mass.
This represents 28% of their total investable assets, according to the study.
Leaving money behind in a former ESRP limits the control the person has with respect to asset allocation and future contributions. For example, when participants move from active to terminated status, they are no longer able to make future contributions to that plan. Rolling the money into either an IRA or a current employer’s plan can avoid taxes and penalties as well as allow the person to take more control over retirement savings.
Despite this flexibility, many affluent Americans are still choosing to leave the money behind in former employer plans, hence limiting investment choices, potential for increased earnings and, ultimately, the retirement nest egg. Whether this “choice” is due to unfamiliarity with rollover rules, the comfort of keeping retirement funds distributed as widely as possible, or even simply a consequence of not getting around to making a change, this lost opportunity is significant.
One-third of all affluent Americans have a significant portion of investable assets “parked” in a former ESRP instead of the current employer’s plan or an IRA, according to the 2007 study. When measured across the entire universe of affluent and high net worth investors, the average allocation to former ESRPs is 9.48%. (Such investors are defined here as having investable assets of $100,000 or more, including retirement accounts such as IRAs, 401(k)s, 403(b)s, etc. but excluding real estate.)
The result: Roughly $95 of every $1,000 invested is positioned for IRA rollover. This rises to $130 of every $1,000 for generation X workers, and $100 for baby boomers.
Further, of the 77% of affluent and high net worth investors who have assets in an ESRP, 44% have assets in a former employer’s plan.
For financial advisors, this presents a wealth of opportunity to capture those assets through IRA rollovers. For 401(k) administrators, it’s an opportunity to capture those assets by consolidating them in the investor’s current 401(k).
As indicated earlier, these assets can be significant. On average, affluent Americans have $260,000 invested in a former ESRP; Generation X, $171,000; and the Silent Generation, $313,000.
It is likely that broker/dealers, banks and insurance companies have not offered such investors a sufficiently compelling rationale for moving these assets.
