Commentary on the New York Times article by Ron Lieber
Financial advisors often help new and existing clients rollover their old 401(k) plans into individual retirement accounts, but some clients may need an extra nudge. Many workers continue to take cash distributions, while others end up wiping up modest balances with IRA fees, the New York Times writes.
Taking the Cash or Saving for the Future
Aon Hewitt found that 43% of workers who leave a firm that offered a 401(k) cash out their accounts, according to the publication. Vanguard, meanwhile, found that to be the case for 31% of the departing workers, the Times writes. What’s worse, the numbers are little changed from 10 years ago, according to the publication.
While some of these cash-outs are by people retiring while others account for tiny 401(k) balances, that still leaves three categories of people cashing out for not the best reasons, at least when it comes to retirement saving, the Times writes.
The first group encompasses people who need the money in their 401(k)s: workers who are laid off, terminated or go of their own free will to help an ailing family member, according to the publication. It also includes those who may move on to a better-paying job but wipe out the 401(k) balance to pay off outstanding debts, the Times writes.
The second group includes people whose employers kick them out of the 401(k)s and roll them over into IRAs, which they can do for accounts with $5,000 or less and, in some cases, even for larger accounts, according to the publication.
Turns out these people are draining their retirement savings funds for nothing other than inflated fees, the Times writes. Thirteen out of 19 such accounts would wipe out a $1,000 balance in just 30 days, according to a 2014 study by the Government Accountability Office cited by the publication.
Therefore, former workers whose employers are likely to use such transfers need to understand which IRA their 401(k) is heading to — and find a better one if necessary, the Times writes.
The third group described by the Times are those who use the 401(k) fund to pay for some fun, like a vacation. The publication says that money could eventually make a significant difference if invested in a retirement account, but for many clients, listening to conversations about compound interest just isn’t their thing, according to the publication.
In addition, financial advisors may want to tell their existing or prospective clients to pay attention to how a 401(k) withdrawal would effect them in penalties and taxes. Some firms, such as T. Rowe Price, already notify departing employees both on the numbers they’ll miss out on and on the tax implications, the Times writes. And other companies, such as Wells Fargo, offer their own calculators that anyone can use, according to the publication. Nonetheless, the Times suggests that given a proper investment, that 401(k) amount, even after taxes, could grow exponentially in the long term.
