Take a look at the person sitting at the desk on your left. Now your right. Odds are that one of you is considering quitting within the next six months as part of The Great Resignation, according to a recent Yahoo Finance/Harris Poll survey.
While the rationale can vary—a Korn Ferry survey found that 36% of professionals want something different from their careers, 32% disliked their company's culture and 25% were looking for improved compensation—one constant should hold true for workers young and old: Do all that you can do to keep your 401(k) plan savings whole.
Jillian Russell failed to heed that advice in her first job, and it still haunts her. Instead of leaving the few thousand dollars she'd socked away in the employer-sponsored 401(k) plan, Russell cashed out the account, shrugged off the pending penalty and tax bill, and headed off to Las Vegas with some girlfriends.
"There's not a single day that I don't think about that money," said Russell, who is now a BOK Financial® retirement plan education consultant.
“Don't let what appears to be a small amount be deceiving because with compounded interest and market growth, it can go a long way and end up being a big chunk of your retirement savings.”- Jillian Russell, retirement plan education consultant
Wait, it gets worse. Any 401(k) plan withdrawal prior to age 59½ is subject to a 10% penalty plus federal and state income taxes that can eat up nearly half of the account balance.
"I know it's going to be tempting, especially if you haven't been with the company that long and maybe you're thinking about paying down some debt," Russell said. "But cashing out is probably the worst move you can make."
Making a move
Created as part of the Revenue Act of 1978, 401(k) plans are seen as an essential part of retirement planning, especially given the broad decline of traditional pension offerings and the uncertain future of the Social Security program. Company sponsors are offered some latitude in how they match employees' savings efforts, but all are prohibited from booting past employees out of accounts with balances greater than $1,000.
Instead, past employees may leave what they've saved in the plan until they decide whether to roll the funds into a new employer's 401(k) plan or into an individual retirement account (IRA).
If you pursue the new employer approach, you'll need to clarify how to complete the rollover, which many companies allow almost immediately. Meanwhile, an IRA is completely controlled by the account holder and may be set up with most financial service firms.
Which move is right for you? It depends. Untethered from employer-defined choices, an IRA offers many more investment options, although some individuals find managing such a fund overwhelming. A new employer's 401(k) plan likely features lower administrative costs, although the investment options tend to be limited.
"Whichever you choose, try to do something quickly because the longer you're away from a job, the further and further the account moves from your top of mind," Russell said. "It may keep growing, but if you move two or three times or the company dissolves, it could suddenly be very challenging for the plan to contact you about your savings."
Halfway out the door?
If you've passed the point of no return with your current employer and you're on the verge of handing in your resignation letter, Russell strongly suggests pausing for the sake of your nest egg.
Be sure you understand your vesting status—that's the portion of ownership in money or assets that have been contributed by your employer into your retirement account.
"Before you quit, check that vesting schedule because you may be just a month or two away from qualifying for another 20% of the company's match," she said. "That could be substantial enough that it's worth adjusting when you want to leave."
Companies use different vesting schedules to match employee savings, ranging from a three-year cliff, in which none of the match is yours until your third work anniversary, to a stair-step approach, where a portion of the match is credited to your account annually for between four to six years. Alternatively, a safe harbor approach provides full ownership to the company match as soon as it's deposited into your account.
If you have a strong hunch that you'll be leaving soon, Russell also recommends confirming that the third-party plan sponsor has your most recent address and phone number, so any post-departure communication arrives without delay. She adds that requesting a distribution form now will also smooth the rollover process when you decide how you want to proceed.
Get the paper copy
Regardless of how you depart, Russell recommends securing a paper copy of the final quarterly statement issued during your tenure. It may seem odd given the growing acceptance of electronic paperwork, she acknowledged, but the information contained in the paper version will help streamline the rollover process with a new employer or IRA firm.
"It's no longer common that people work for the same company for 40 years and have a big old pension waiting for them," Russell said. "So, it's important to remind ourselves that we're in the driver's seat, and if we don't want to work for the same company forever, then we need to stay on top of our retirement savings."