One of the more common questions I am asked is, “What should I do with my 401K?”  Normally, the question is tied to a particular event. In today’s society people are switching jobs and careers more than ever.

Congress has recognized this fact, and has created a series of laws which allow a certain level of portability when it comes to retirement savings. But, with portability comes complexity. Evaluating when and what to do with your retirement savings when you change jobs, get laid off, or hopefully retire, can be confusing.

Today’s retirement plans come in all shapes and sizes. Whether it’s an employer sponsored qualified (tax-deferred) plan (401K, pension, etc.) or an individual non-qualified (after-tax) savings plan, there are many options. One of the major weaknesses I come across with a person’s retirement plan is a lack of knowledge in what the plans advantages and disadvantages are, and what options they may have of doing something different.

I like to suggest a basis process to evaluating the options available and choosing the best one. We will briefly examine typical 401K savings plans while employed, options when leaving for new employment, and options when retiring.

While Employed

One of the most common retirement plan types today is a 401K or 403B plan.  Depending on how the employer has set up the plan, it will largely determine how much of your retirement savings should be involved in the plan - not all plans are created equal. Some 401K plans are administered quite well  with low fees and many investment options while others are the exact opposite. So a brief five step process to evaluating your company’s 401K plan would be:

1.) Find out the fee structure and different investment options available.

2.) Determine whether the company offers a “match” on your savings (almost always worth utilizing if offered).

3.) Understand the rules for withdrawing and/or transferring your retirement savings.

4.) Does your personal financial situation allow for alternative savings strategies?

5.) Decide if you will manage your own account. Unless you have the mental make-up and will devote the time necessary to monitor and understand the financial markets, qualified professional management is advised.

New Employment

People are switching jobs more than ever for a variety of reasons. There is a whole “cottage” industry within financial services now devoted to “rollover” management. Most of my clients have a rollover IRA from a previous employer. The advantage rollover IRA accounts can possibly offer is lower fees and more investment options. For example, I utilize an independent discount broker/dealer for my clients to offer the maximum investment choices with minimal fees.  In most cases, a company’s retirement plan can’t compete with this arrangement.  Below is a four step process for evaluating your retirement savings options when leaving your place of employment:

1.) Reacquaint yourself with the company’s rules regarding transferring or    rolling over your retirement account.

2.) If you’re starting a new job, refer to the five step process in the previous section.

3.) Evaluate “rolling over” your savings into an IRA. Most discount brokers offer this option for very low fees.

4.) Again, decide if you will be able to manage the account yourself. A professional may be able to provide you with a larger return.

Retirement

Finally, the best part is deciding what to do when you actually retire. This decision should not be taken lightly as the process is more complicated than the first two and requires examination beyond the scope of this article. Still, here are some things to consider:

1.) When retiring, the same option as when you leave your job is there.  Many employers let you keep your retirement savings with their plan, but most retirees will find it’s best to “roll-over” their savings into an IRA.

2.) If you have a pension from your employer, many offer a “buyout” option which gives you a one time cash payment in lieu of future benefit payments. Should you take it?

3.) The financial services industry pursues recent retirees heavily with many different sales pitches for their hard-earned savings. It’s best to evaluate your options with someone who is “independent” and willing to ask questions.

This brief article only briefly touches the important decision making process involved when choosing how to “park” your retirement savings. It’s not just where to invest, but which vehicle will maximize return and efficiency. If you aren’t sure you’re getting the most from your plans, ask for help. No one wants to end up like the Enron employees.

Article by Barrett Haus

Barrett Haus provides independent (through his own companies) financial and tax advising for businesses and individuals. He can be reached at 407-222-5120 or barrett@hausfinancial.com. Check us out on the web at www.hausfinancial.com.