Americans change jobs frequently, and that can mean multiple retirement plans–pension or profit-sharing plans, 401(k) or 403(b) plans, and personal individual retirement accounts.
The question becomes, what to do with all these retirement plan assets?
This is an important issue to bring up with clients, because a hodgepodge of plans without proper oversight and management of plan assets may jeopardize a client’s goal of living comfortably and independently in retirement. The advisor needs to step in–i.e, help clients understand and prepare so they know what to do with these assets and don’t make uninformed decisions on the last day of work.
For example, it’s possible a client will be given a big packet of forms and material on that last day. These cover COBRA, health plan continuation, unused vacation days and the 401(k) plan. An uninformed client may think the only option is to “take” the retirement assets, not knowing there are four options (take, leave, move or rollover).
For many employees, particularly those under age 59 1/2 , taking the assets is likely the worst option. Some may be tempted to use these assets to meet current expenses or to pay for a long-desired indulgence. They may not realize that, in most cases, a distribution from a 401(k) or other retirement plan will be subject to a 20% federal withholding tax, and may be subject to a 10% federal income tax penalty if the client is under age 59 1/2 .
Clients can avoid these taxes if they leave the assets with the former employer. However, they may lose some flexibility since plan trustees determine the investment choices and there will be no access to loan provisions. Asset diversification may also suffer if the prior 401(k) was over-weighted with investments in the former employer’s stock, or if the mutual fund options don’t synch up with those in the new employer’s plan.
Moving the assets to the new employer’s plan may relieve some of those concerns, and consolidating assets into one account and thus eliminating additional statements simplifies the client’s life. But the advisor should evaluate the new plan to ensure it has a diversified mix of investment options and allows the transfer of assets.
What about rolling over assets? This has become an increasingly popular option as investors and their advisors look to take greater control of retirement assets. As with moving the assets to the new employer’s plan, rollovers to a consolidated IRA or a variable annuity IRA simplify record-keeping and, importantly, allow for easy and efficient asset diversification.
Like other rollover options, variable annuities make it easy to build a well-diversified portfolio because they offer a wide selection of investment options in different asset classes and investment styles. That gives clients a range of asset diversification to suit their investment styles and risk tolerances.