Retirement mistakes to avoid when changing jobs
The strong jobs market means more Americans are landing new jobs as they pursue better, or different opportunities. But, one factor that job seekers may not be considering when they are hunting for a new job is retirement savings plans.
“There are lots of factors to consider with a job change – generally employees switch jobs for opportunity and compensation,” according to Joseph Ready,Wells Fargo’s executive vice president of institutional retirement and trust.
Ready says job seekers need to look at the total compensation an employer is offering, not just salary, and part of the total compensation is an employer’s retirement savings options.
Many employers offer 401(k) plans – employer-sponsored retirement plans that both employees and employers can contribute to. Earnings in a 401(k) plan are tax-deferred. Employers can offer different contributions to an employee’s retirement savings plan, and employees should consider what benefits are offered when searching for jobs.
In addition to an employer’s retirement savings match and or contribution, potential employees should consider the vesting schedule of employer-sponsoredretirement plan. When an employee is 100% vested in the retirement plan, they own 100% of the savings. Employees always own 100% of the money theycontribute, but they don’t necessarily own 100% of their employer’s contribution. What this means, is that if an employee leaves before the employer contribution vests, they forfeit some or all of the employer’s financial contributions.
According to Ready, about half of retirement plans have a staggered vesting schedule, for example 20% a year. If an employee leaves their job before vesting is complete then they give up a portion of the employer’s match. About one-quarter of retirement plans vest immediately and another don’t vest until a significant milestone, such as after one-year of employment.
For plans that have a staggered or milestone vesting schedule, Ready noted that, “If you plan on being a job hopper, then the vesting schedule will matter.”
Consolidating retirement savings
For employees that are changing jobs, another big consideration is whether to consolidate retirement accounts. Some employers allow past employees to keep their retirement savings plans, raising the question: Is it worth keeping the plan with the old employer, or should it be transferred to the new employer?
According to Ready, if the option to keep the old plan is there, then there are three considerations retirement savers should consider: a cost review, an investment options review and whether rolling over to an IRA is an option.
A cost review involves comparing the costs associated with the old and new employer’s retirement savings plans. For example, when leaving a large company to go work at a small company it is possible that the larger company may have more cost effective options due to scale.
It is also important to consider the retirement investing options that the companies offer. If the past company has better options then it might be worth the inconvenience of maintaining a couple retirement plans.
Age is also a factor. According to Ready, if you are young and don’t have much in your retirement savings plan, then you may decide to take that money and put it in a new plan because it is convenient.
For the more established worker who has contributed for years, when pondering consolidation, the cost differential (if any) between the retirement accounts should be examined. In the case that the new employer’s retirement accounts have much higher expenses, then it might be worth maintaining different accounts.
But, for those who have changed jobs a few times in their career, at some point they should consider consolidating. According to Ready, it does not make sense to have more than three accounts.
The final consideration is whether rolling over to a Roth IRA is an option. A Roth IRA is an individual retirement account that offers tax-free growth and tax-free withdrawals in retirement.