Author: Sarah Cattan

Sarah Cattan is a 401k specialist and focuses on business owners and their retirement plans.

Have money in a 401k at an old employer? What to do with your old 401k.

What to do with your balance in an old employers 401k or retirement plan.

Most people don’t work for one employer their entire lives anymore. The days of people relying on a pension from their employer are seemingly coming to an end.

401k’s came into existence in the 1980’s. Since then most employers have made the move from defined benefit pensions to defined contribution 401k’s.

  • Defined Benefit– A type of retirement plan in which an employee’s pension payments are calculated according to the length of service and the salary they earned at the time of retirement.
  • Defined Contribution– A type of retirement plan in which the employer, employee, or both make contributions on a regular basis. Future values fluctuate based on investment earnings and contributions.

Back in the 1980’s, 401k’s were presented as giving employees the power to choose their own investments. In reality, they were oftentimes a modest cost savings to employers over their defined benefit counterparts since all employers aren’t required to contribute to an employee with a 401k. Typically the total employer contribution amount is lower as the employee is expected to contribute as well.

The 401k is designed for employees to save for themselves for retirement. The money the employee contributed can go with the employee when they leave the place of employment. The employer contribution is also eligible to go with the employee if the employer contribution is vested.

34% of employees say they plan to leave their current employer in the next 12 months according to Mercer. So wondering what to do with an old 401k balance can come up quite often as there are many people changing jobs that have balances in an old employer’s 401k.

There are four options that may be available to you when it comes to your old 401k: You can leave your account alone, roll it into an IRA, roll it into your new employer’s plan, or cash it out. We will walk through each here.

1)   Keep your money in your former employer’s plan.

If you have a 401k balance over $5,000 you legally cannot be forced out of the 401k plan. If you have under $5,000, your employer has the option to cash you out of the plan which can potentially cause you issues you may not be aware of.

Good things:

  • You don’t have to do anything
  • You are already set up to view your account.
  • You can take penalty-free withdrawals from an employer-sponsored retirement plan if you leave your job in or after the year you reached age 55 and expect to start taking withdrawals before turning 59½.

Not So Good Things:

  • Once you’re no longer an employee, your access to your money may be limited, you are no longer eligible for any loans, and you cannot add more money to the account. You may have to go through your old employer for any changes or requests.
  • You have to remember to make sure your old employer has your current information such as your mailing address. This can be annoying if you have multiple 401k balances sitting out there. Plus, if your old company gets bought, changes plan providers, or the HR person changes, you may not have easy access to your login information or your new account number.
  • Investment advice is typically done at employee education meetings at the business, so once you are no longer employed typically you aren’t attending these meetings.
  • Plan may offer expensive investment options or lack investment options you want. Do you know the administrative costs the 401k passes to the participants? What about your mutual fund expense? See my blog about 401k fees here.

2)   Move your money into an IRA

This choice gives you the most control and flexibility. With a 401k plan, the employer chooses the investments that are available in the plan and has more rules, with an IRA you aren’t limited to what the employer has chosen for the plan.

Good Things:

  • Working with a financial advisor, you will have access to advice for your certain situation. This can be especially helpful if your 401k has been at your old employer for years and you are just now taking a look at the investments you were allocated into. It is also helpful if you are close to retirement age, to sit down with someone to discuss a course of action.
  • Ability to combine multiple employers’ old 401k accounts into one IRA.
  • Greater control over your investment expenses. 401k investment fees are in a participant fee disclosure, and in some cases they’re higher than what you’d pay for comparable investments outside the plan.
  • Greater freedom to name beneficiaries. The beneficiary of your 401k plan, by law, must be your spouse; you have to obtain a signed release from him or her if you want to name anyone else. An IRA can be more flexible.

Not So Good Things:

  • Taxes will be withheld unless you move the money from your 401k to an IRA via a trustee-to-trustee transfer. Not all recordkeepers will do this, and sometimes the check is mailed to the employee rather than the new IRA custodian. You have to make sure the money is in the account within 60 days, so the disbursement of funds aren’t treated as a withdrawal by the IRS.
  • It can take a bit of effort to figure out how to move the accounts by yourself.

3)   Move your money into your new employer’s 401k

You should certainly contribute to your new plan if your employer offers a match, but should you transfer your old account into it?

Most 401k’s allow you to transfer old employer’s 401k balances into it. Not all do though, so you should check with your new employer before you do so.

Good Things:

  • Consolidating your retirement money makes it easier to view and manage. When you’ve left a retirement account at a company you no longer work for, you may pay less attention to its performance or downplay its importance in your overall picture.
  • The new plan may offer more attractive investment options than the old one, as well as additional services, such as access to a financial advisor.

Not So Good Things:

  • The financial advisor on the plan may not be a fiduciary. The advisor may just do group meetings with little access to personal advice for your specific scenario.
  • The new plan may offer fewer investment options or investments that don’t meet your needs.
  • Fees can be high in 401k plans; do you know the administrative costs the 401k passes to the participants? What about your mutual fund expense?
  • Paperwork to move the money can be confusing and requesting certain documents and letters from the old 401k plan sponsor/recordkeeper can be tedious.

Generally, the smartest move is to evaluate the fees charged by the investments that you’d use in each plan and go with the plan that offers the lower-cost options. Again, the participant fee disclosure might not have all plan fees listed and it isn’t the easiest to determine.

4)   Cash out the account

Good Things:

  •  It’s money you can use for other purposes.

Not So Good Things:

  •  You could no longer have any retirement savings.
  •  Distributions from your 401k could also push you into the next tax bracket, giving you a bigger tax bill.
  • You will owe income taxes on your money.

If you’re in a 28% combined federal and state tax bracket, for example, and cash out a $40,000 account, you’ll have only $28,800 left after taxes. If you are under 59.5 there would also be a 10% penalty which would leave you with $24,800, far from the $40,000 you were expecting.

Not all of these options are available in everyone’s situation. If you find it confusing or overwhelming, I’d be happy to speak with you regarding your situation to help you with the decision, or to start the process.

The content of this article is provided for information and discussion purposes only. It is not intended to be a financial recommendation and should not be the sole basis for your investment or tax planning decisions.

SIMPLE IRA

Is a SIMPLE IRA actually simple?

A SIMPLE IRA stands for Savings Incentive Match Plan for Employees. It is a type of retirement account for small businesses, and for people who are self-employed.

It works similarly to a Traditional IRA, where your contributions grow tax-deferred, which can harness the power of compounding interest. When it comes time for retirement, your distributions are taxed as normal income. Typically, you are in a lower tax bracket when you retire than when you are working.

A SIMPLE IRA is a benefit that can help you attract and retain talent in this competitive job market, even as a small employer.

Your company is eligible for the SIMPLE IRA if it has no more than 100 employees and does not sponsor another retirement plan. Typically, the startup costs and administration of a SIMPLE IRA are lower than a traditional 401k, but the IRA is less flexible when it comes to a few things such as eligibility, matching, and vesting periods, etc.

Why would you choose a SIMPLE IRA?

SIMPLE IRAs are ideally suited for start-ups or small businesses to give their employees a way to save for retirement.

SIMPLE IRAs allow employees to make contributions to their accounts. A SIMPLE IRA requires employers to contribute on the employee’s behalf. The employers are required to contribute a dollar-to-dollar match of up to 3% of salary, which can create an incentive for employees to save for their retirement. An employer could also do a flat 2% of pay, regardless of whether the employee continues to contribute to the account.

  • For 2018, if you are under 50 you can contribute up to $12,500. If you are over 50, you are allowed a $3000 contribution, for a total of $15,500, not including the company match portion.

Example: Sarah Smith, who works for ABC INC., earns $40,000 a year. She contributes $5,000 to her SIMPLE IRA in 2018. ABC, which chose the matching option, contributes $1,200 (3% of $40,000). Therefore, the total amount moving into Sarah’s account in 2018 is $6,200.

Continuing with the ABC INC. example, suppose that Rick Johnson, the chief shareholder, is 54 years old. Rick defers the maximum $15,500 of his salary to his SIMPLE IRA. If he earns more than $516,667 in 2017, a 3% match would be another $15,500, bringing Rick the maximum $31,000 SIMPLE IRA contribution this year.

Too Small for a retirement plan?

Tax credits for your small business is a perk of putting a retirement plan in place. Companies that sponsor SIMPLE IRAs are eligible to receive a tax credit for 50% of some of the administrative costs generated by the plan each year for the first three years of the plan’s life. There is a maximum of $500 per year on the amount that may be credited.

Depending on how your company is structured, the matching contributions that the company contributes to the employees can typically be deducted. If you are a sole proprietor, you can deduct from your personal income contributions you make to a retirement account. Either way, you or your business get a substantial income tax savings with these contributions. Please consult with a knowledgeable CPA or tax adviser.

Example: Ron, a sole proprietor, contributes $11,000 this year to a qualified retirement account. He can deduct the entire amount from his personal income taxes. Because Ron is in the 28% tax bracket, he saves $3,080 in income taxes for the year (28% × $11,000), and he has also saved $11,000 toward his retirement.

Example 2: Carrie, a part owner of ABC Corp., who makes $105,000 a year, contributes $10,500, which is 10% of her W2 income, this year to a qualified retirement account. The W-2 Carrie gets from her employer should not include her SIMPLE IRA contributions as taxable income. Because Carrie is in the 30% tax bracket, she saves $3,150 in income taxes for the year (30% × $10,500), and she has also saved $10,500 towards her retirement.

ABC Corp, does a 3% match, which is an additional $3,150 in Carrie’s account for a total of $13,650. ABC Corp, can deduct Carrie’s contribution on their tax return a well, as the company may deduct all contributions made to employees’ SIMPLE IRAs on their corporate tax return.

The deadlines for setting up a SIMPLE IRA or a Safe Harbor 401(k) for 2018 is October 1st, 2018. But don’t wait until a few days before the deadline to set up your plan; it can take a few weeks or more to set up your plan.

If you missed the October 1st, deadline, all is not lost, you can set up a SIMPLE IRA for 2019 or look at a traditional 401k for 2018.

Whether you’re a business owner seeking a retirement plan for your employees or are self-employed, the SIMPLE IRA plan could be the answer to your retirement needs. This is especially true if you work alone but eventually want to run a bigger business.

Martin Financial Group works with businesses in Kentucky and Southern Indiana and can help you determine what type of employer sponsored plan is right for your business.

This article is for educational purposes only, each person’s situation is unique, and this article should not be taken as advice.

401k plan fees – Do you know what they are?

I joined Martin Financial Group recently to work with businesses on their company sponsored retirement plans. I specifically have worked with many businesses on varied aspects of their 401k plans at my prior employer. This blog post is specifically geared towards business owners, plan sponsors, trustees, and people involved in human resources. Many 401k plan participants may be curious how 401k fees work on a plan as well.

My goal is to write a series of blog posts that will help you understand 401ks better and hit on topics that are relevant and important to employers and employees. Martin Financial Group’s goal is to make your organization’s retirement plan more effective, efficient, and align with your organization’s overall objectives. We are happy to help pull, review, and analyze your plans current fee disclosure.

When working with plan sponsors, I ask if they know the fees they are paying. Many times the plan sponsor can tell me the amount the business pays in hard dollar fees to the recordkeeper and the third-party administrator. What the plan sponsor typically doesn’t know or is unfamiliar with is the internal expense of the 401k plan. Typically, where you find these internal expenses is on a document or documents called a 408(b)(2).

What is a 408(b)(2)?

The 408(b)(2) should be received by the plan sponsor from each service provider who is receiving payment from the company’s 401k plan.

A “payment from the plan” means that the fees are being collected from the plan participants. Service providers can include advisors, recordkeepers, third party administrators, custodians, auditors, and anyone who provides a plan service. Employers might only receive disclosures from providers that are paid out of the plan and not necessarily from providers that they make a hard dollar direct payment to.

What is a 404(a)?

The 404(a) is a document that is distributed to participants and is intended to give plan participants a better understanding of the costs associated with the 401k so they can make more informed investment decisions. It typically does not lay out any specific asset based fee or any admin costs that are passed on to the plan.

Parties typically compensated by a 401k

  • Third Party Administrator- Usually a flat dollar amount plus a variable per head fee or sometimes a percentage of assets paid from the recordkeeper. Ex. ($1000-$5000)
  • Recordkeeper– Can be a % of assets fee, some providers are a flat fee plus a per participant fee,  or some also get compensated within the investments Ex. (A 1,200,000 plan with a .5% asset fee is $5000)
  • Investments- Different share classes have different fees. If sold by a broker the broker could be paid out of the investments. The same fund could range quite a bit depending on the share class. Ex. (American Funds Balanced R1- 1.37%, American Funds Balanced R6- .28%)
  • Advisor- Can be paid by the 12-b1 in the investments or if a fee based advisor it can be pulled separate. Ex. (Typically .25%-1.5% of the assets in the plan)
  • Fidelity Bond- A fiduciary bond provides insurance protection against the possibility of fraud or embezzlement by a fiduciary Ex. ($100-$300)

It’s worth pointing out that there are two methods used to collect service provider fees from participants. Some plans remove fees directly from a participant’s account. Such fees are transparent, making it easier for plan sponsor and participant alike to measure service value. However, some plans use a “revenue-sharing” method where the fees are removed from the participant’s investment returns before they become a part of the participant’s retirement account. Such “hidden” fees are not reported in a participant’s quarterly plan statement, are difficult to identify and have led some plan participants and plan sponsors to believe their retirement plans are free. I’ve outlined where the fee components are usually taken from in the section below.

Where do we find this 408(b)(2) document?

Typically, a good starting point is on the recordkeepers plan sponsor website (ADP, VOYA, John Hancock, Fidelity, Principal, etc.). This would be labeled as the plan fee disclosure or 408(b)(2). You can also request them from your financial professional.

Employers must comb through the 408(b)(2) documents in detail to first understand the services being provided and whether the service provider or the financial professional is a fiduciary. Service providers or financial professionals acting as fiduciaries must specifically state that they are doing so. If a provider is silent regarding fiduciary status, it is not a fiduciary.  

Fee components on a 401k plan usually include:

1. Take-over or conversion fees—Employer
• A one-time expense
2. Investment management fees—Participant
• Charge by money manager
• Asset-based charge
3. Administrative fees—Employer or Participant
• Annual fees for recordkeeping services
• Base fee and/or per-employee cost
• Asset-based charge
4. Transaction fees—Employer or Participant
• Activity-based charges—loans, distributions
• Dollar amount per transaction
• Asset-based charge
5. Insurance features—Participant
• Mortality and expense-risk fee
• Asset-based charge
6. Direct or indirect fees—Employer or Participant
• 12b-1 fees
• Advisory fees

 

Therefore the 408(b)(2) can be a long document that is not the easiest to understand. Understanding and compiling your plan fees from the 408(b)(2) and fees paid hard dollar can be confusing, but it doesn’t have to be with our experience and knowledge. A proper review of a plan’s provider disclosure report by a fiduciary can result in plan improvements to the benefit of business and the participants.

Martin Financial Group acts as a fiduciary on our clients 401k plans, discloses all fees, and can help you comb through your current provider to meet your fiduciary duties on benchmarking and reviewing the fees on the plan. You can read more about fiduciary responsibilities on the Department of Labor website . If you’d like help with your 401k or retirement plan, click here.

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