When an employee leaves, I know you must have your offboarding procedures: take their security card, give them a COBRA application, perhaps conduct an exit interview. But somewhere in those procedures, I beg of you to remind them to take their 401(k)s with them.
New research from Charles Schwab shows 43% of assets held by 401(k) participants who left their jobs in the first quarter of 2008 had not been moved a year later.
And no, there's nothing terribly wrong with that, but participants should be encouraged to be active and engaged about what they do with those savings. "We urge people to educate themselves on their options when they leave a job, especially if they expect to be out of work without access to a savings plan at a new job," says Rene Kim, Charles Schwab senior vice president.
"In many cases, rolling an old 401(k) into an IRA can be a strategic move, because it is tax free, there is no penalty, and an IRA provides more investment choices," Kim continues. "A rollover IRA can also keep retirement savings more top of mind. People who leave money in a previous employer´s 401(k) plan often forget the money is even there, which can result in asset allocations falling way off balance based on an individual´s savings objectives and risk tolerance."
And while rolling savings into a new employer's plan also is a good move, Kim (and every other retirement expert on the planet0 strongly warns against cashing out.
"Unless there is a dire and immediate financial need, cashing out a 401(k) is almost always a bad idea," Kim says. "Cashing out eliminates the power of compounding savings, and people generally find it very hard to get back on track once they begin tapping retirement savings for shorter term needs."
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