How can job hoppers manage retirement planning?
In today’s business environment, it’s not uncommon for people to switch jobs every few years. Since pensions are mostly a thing of the past, staying at one place of employment for one’s entire career doesn’t have as much of a draw. Similarly, research shows that switching jobs can be strategic to increasing salary. But, while earning a higher salary now may seem like the best financial move, it may not be beneficial when it comes time to retire. Below we highlight some drawbacks that young workers may need to consider if they are prime for “job hopping.”
Younger workers may not realize when starting a new job that there is generally a waiting period before becoming eligible to start saving money and contributing to an employer-sponsored retirement plan. Every time an employee moves to a new company, there’s another waiting period for contributing to an employer-sponsored plan, and during this period investors lose valuable time to contribute to future savings. The more often workers job hop, the more time they lose on potential future savings.
Another drawback to job hopping is employees don’t have the opportunity to accumulate a large amount of assets in any one plan. If there isn’t a certain minimum dollar amount in an account, plan sponsors typically can force a distribution. Smaller accounts still add to the cost of the overall plan, so companies will notify non-active participants of the options to either roll the funds over or receive a check of your accumulated savings. However, investors need to proactively roll funds over, otherwise he or she may receive a check of their 401(k) balance, which younger workers don’t always put back into retirement savings.
Consolidating assets from various 401(k) plans can make it easier to manage retirement savings. So why not roll everything into an IRA? There’s an argument to keeping money in a 401(k) and not rolling over to an IRA because there are safeguards and protections with ERISA plans. In addition, 401(k) accounts are held away from creditors and usually have lower fees than a brokerage IRA.
If choosing to job hop, a good solution, if available, is to roll previous 401(k) accounts into your current employer’s plan. There aren’t too many companies that won’t allow the rollover of a former 401(k) to a current one, but they will just want to make sure it’s qualified money to be in that account. If your plan sponsor allows a roll over, it can be beneficial to keep that money together in a 401(k).