By Spencer Williams
As we begin the annual tradition of making New Year’s resolutions to improve our lives in 2017, we shouldn’t forget about positive financial changes we can enact in the coming year.
If you’re one of the millions of Americans who switched jobs in 2016, or plan to do so in 2017, there are steps you can take today that can improve your retirement readiness tomorrow. You likely already know the importance of enrolling in your new employer’s defined contribution plan, and taking advantage of any employer matches offered through the company’s plan.
But these aren’t the only retirement-saving tips that job-changers need to keep in mind when they transition between employers. Here is a checklist of essential steps that job-changers should resolve to complete in 2017:
Don’t just roll in your most recent prior-employer account
The Employee Benefit Research Institute, a nonprofit research group based in Washington, D.C., estimates that the average American will change jobs 7.4 times over the course of a 40-year working life. Unfortunately, at a time when the U.S. workforce is more mobile than ever before, the process of rolling retirement savings accounts from one employer’s plan to another is extremely complex and time-consuming, as this diagram demonstrates .
Retirement-plan sponsors have the right to unilaterally roll stranded accounts with less than $5,000 into safe-harbor IRAs and to unilaterally cash them out with less than $1,000.
Can you picture yourself at age 65 having to track down and consolidate more than seven retirement savings accounts? It’s not a pleasant thought for most of us, to put it mildly.
The average roll-in takes between five and six weeks to complete , a study of mobile workforce behaviors published by Boston Research Technologies in 2015 found. Some retirement-savers have to wait longer—the study revealed that 27% of plan participants who undertook a roll-in said the process took more than two months from beginning to end.
It would likely take between 35 and 42 weeks, at a minimum, to complete seven such roll-ins, according to the Boston Research Technologies study. This is why people who changed jobs in the past six months, or expect to do so in 2017, should roll all of your retirement savings accounts—not just the account in your most recent prior-employer plan—into your new-employer plan.
Doing this today will save you a lot of time, and money. To get started, ask the human resources department at your current employer if it offers full or partial roll-in assistance. You can also engage a third-party provider of roll-in services for a flat fee.
Make sure your prior employers have your current contact details
If you haven’t yet rolled all your prior-employer retirement savings accounts into your current-employer plan, then you need to make sure that the record-keepers for your prior-employer plans have your up-to-date postal and email addresses on file.
This doesn’t just apply to your most recent prior-employer plan—if you’re changing jobs, you should contact the record-keepers for all of your prior-employer plans. If you don’t, then you’re playing Russian roulette with your hard-earned retirement savings.
Retirement-plan sponsors already have the right to unilaterally roll stranded accounts with less than $5,000 into safe-harbor IRAs, and to unilaterally cash out stranded accounts with less than $1,000. If any of your savings accounts in prior-employer plans have been rolled over to safe-harbor IRAs, and the record-keeper for the relevant plan sends the notice to an out-of-date address, then you are out of luck. The same is true if one of your accounts in a prior-employer plan is cashed out, and the plan’s record-keeper sends the check to an out-of-date address.
In August 2016, plan sponsors became subject, under the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 , to higher fines for improperly maintaining records and delivering statements to beneficiaries. This gave sponsors much greater incentive to roll stranded accounts from terminated employees out of their 401(k) and pension plans.
The human resources department at your current employer, or a third-party provider of roll-in services, can help you track down your stranded accounts.
If old employer accounts have been rolled over to safe-harbor IRAs, get them out
If, in the process of contacting record-keepers for your former-employer plans, you discover that one or more of your stranded accounts have been rolled over to safe-harbor IRAs, act quickly and begin moving them to your current-employer plan.
Safe-harbor IRAs aren’t always “safe” investment vehicles for storing your retirement savings. The money market funds that these accounts are required to invest in generate negligible interest, which is often surpassed by their annual fees.
To avoid the ongoing decay of your retirement savings in a safe-harbor IRA, begin the roll-in process as soon as you can.
Rolling in your prior-employer accounts on an ongoing basis, as you change jobs, prevents you from losing assets over time in a safe-harbor IRA—and from having to keep track of multiple accounts and contact numerous record-keepers as you move between employers and/or homes.
Always avoid the temptation to cash out
This tip applies to all of you, regardless of whether or not you are changing jobs in the near future. Prematurely cashing out your retirement savings account is perhaps the worst mistake you can make along the journey of saving for retirement.
Reinforcing the importance of never cashing out takes on a new urgency in December and January, when all of us accrue bills related to the holiday season. Prematurely cashing out a retirement account may help pay your holiday bills in the short term, but cash-outs hurt you twice: through higher taxes and penalties (federal and state taxes, 10% early withdrawal penalty) in the short term, and they threaten your retirement readiness over the long term.
Best of luck to all of you as you save for retirement in 2017.
Spencer Williams is President and CEO of Retirement Clearinghouse, a portability solutions provider.