There’s yet another wrinkle in the new age of retirement and job insecurity — keeping track of all those company retirement savings plans you’ve racked up, along with that IRA you opened years ago, and creating a coherent investment strategy with them.
People who shift from job to job, they accumulate them.
Job jumping is particularly an issue for college-educated people born in the latter years of the Baby Boom (1957-1964). Men with a bachelor’s degree or higher held 11.4 jobs between the ages of 18 and 46," according to a Bureau of Labor Statistics report. Women of the same educational status held 12.2 jobs during the same time span.
Combine the emergence of the multiple-401(k) owner with Americans’ long-standing neglect of their retirement plans and you have a problem.
Though retirement experts of all kinds are familiar with the problem, no one knows how many Americans are juggling multiple 401(k)s and IRAs.
The little data out there, however, does indicate that a sizable number of American households have at least two types of retirement plans.
As of May 2011, 69 percent of U.S. households (or 82 million) said they had employer-sponsored retirement plans, IRAs, or both, according to the Investment Company Institute. About a third (31 percent) had an IRA and employer-sponsored plan.
According to the latest data available from Bureau of Labor Statistics, 16.75 percent of the 72.5 million participants in 401(k)-type plans in 2009 had left their money in the retirement plan of former employers.
The plan jumble has enormous ramifications along the road to retirement, from investment strategy and performance, to planning and execution.
First, most people have little time or attention for one retirement account, never mind multiple ones.
At the same time, people know little about investment principles and strategies, which means neglected accounts are more likely to perform badly because they are poorly constructed, without proper diversification and asset allocation.
In most cases, experts say, people should consolidate their accounts; to do otherwise flies in the face of fundamental investing principles.
Problems with multiple retirement accounts can also arise when you actually reach retirement age, at which time regulations force you to draw down your retirement savings on a pro-rated annual basis.
For instance, at 70.5 years (or older if you work beyond that age), 401(k) and IRA holders must make required minimum distributions. The actual amount varies by person and is based on an IRS formula.
You’d be getting small checks from all over the place.
To keep the financial complexity to a minimum, experts say most people should consolidate accounts.
How do you consolidate? In what’s called a rollover, most companies allow people to move funds from an old employer to the new one.
People can also convert their 401(k) into an IRA. Both are without tax penalties and little, if any, transaction costs.
Consolidating funds into an IRA, new or existing, has two main advantages: selection and cost.
Most company 401(k)s have a limited number of investment choices — in many cases, a variety of equity-, fixed income- and cash- (money market) oriented mutual funds. The IRA choices, however, are vast, including more asset classes and financial instruments, and almost any fund you had in your 401(k) plan.
Secondly, IRAs generally cost less in fees, especially compared to the 401(k)s of smaller companies that are unable to negotiate favorable terms with the administrators and the companies providing mutual funds in the plan.
Like with most financial decisions, however, special circumstances can mean exceptions to the rule, and, experts say, there are reasons why people may want to hold onto a (401(k) now and then.
401(k) Exceptions - In a financial context, 401(k)s are more useful vehicles for people who feel they may be in need of money. For instance, you can borrow from your plan without any penalties or taxes, as long as your pay back the money in five years. (It's not permitted with IRAs.)
Similarly, there are tax benefits. Owners can take advantage of so-called early, hardship withdrawals, beginning at 59.5 years for a number of reasons, without penalty.
And if you lose or quit your job between 55 and 59.5 years, you can take an early withdrawal without the usual 10 percent penalty — although you'll still have to pay income tax, on an ordinary-income basis, on the withdrawn sum.
In the end, whether it’s an IRA or 401(k) may not matter, as much as paying attention and keeping track of your money. In most cases, consolidation is the easiest way to achieve that.
Source: Albert Bozzo, CNBC
The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
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