For job jumpers, the excitement of a new position and higher salary may be a lure to change companies, but it’s important to remember the 401(k) you have built at the company you’re leaving behind.
The short tenure rate—which measures the fraction of positions that end after being held for less than a year—started rising in August 2021 and peaked in March 2022 at 9.7% year-over-year, according to LinkedIn. Even with the turbulent economy, workers are still leaving their roles more quickly than last year, but that growth has been slowing, LinkedIn found.
A number of factors may be driving the rise of “quick quitting,” including inflation, which is pushing many workers to seek higher wages, a strong job market for job seekers, and a demand for certain skills in well-paid industries like tech and finance.
“Years ago, people stayed in jobs for a long time and had pensions. They were lifers with guaranteed incomes in retirement. Now, 401(k)s displaced pensions and the onus is on employees to save and position their own retirement. That’s a lot more responsibility and you have to pay attention to your accounts,” said Dan Simon, retirement planning adviser with Daniel A. White & Associates. “You might have seven or eight jobs in an effort to get higher salaries, but that’s a lot of retirement accounts to juggle.”
When you leave a job, you have several options on how to handle your retirement accounts.
Leave the money in your old employer’s 401(k) plan. While it’s possible to just let the funds sit in an old account, this may be risky because companies can be acquired and plan sponsors can change, making it more complicated to access your funds or track down accounts.
You also run the risk of forgetting to update your beneficiaries in old accounts, making it complicated after marriages, divorces or having kids to keep records up-to-date if the accounts aren’t in one place.
“The beneficiaries follow your 401(k) designations, not your will. So whatever an old 401(k) says goes,” said Heather Kessler, a wealth planner and relationship manager at Coldstream Wealth Management.
Roll it over to your new employer’s 401(k) plan. This might be the best option so you can keep your investment options current and accessible. If you’re not working with a financial adviser, it can be easier having all of your money in one place where you can manage the different investment choices, Kessler said.
Another benefit to keeping the funds in a 401(k) is that it gives you access to loans on that money, which are not an option on individual retirement accounts (IRA), said Simon. Fees inside a 401(k) also would likely be lower than in an outside IRA, he said.
Roll it into an outside IRA. If you choose a traditional IRA, you have the benefit of controlling more precisely where you want to invest those funds, while corporate 401(k) typically have limited investment options, Simon said.
If you have an IRA, you typically would have access to more advice from a financial adviser, but that also means you’ll likely be paying more in fees, Simon said.
Meanwhile, you could also roll the funds into a Roth IRA and pay taxes now on the funds. That way, going forward, the funds would grow tax-free, he said.
“Many people are worried that taxes in retirement could be higher down the road, so they’re worried about that risk,” Simon said.
You can move the funds to an IRA on your own or hire a financial adviser.
“Whether you get a financial adviser is entirely up to you. Do you like finance? Do you want to do your own research? Or do you need broader financial advice?” said Daniel Milan, investment adviser representative and managing partner at Cornerstone Financial Service.
Take a direct distribution. This option is not recommended unless you’re over 59-½ or if the amount is really small and won’t make a difference either way in your long-term financial plan, said Kessler. If you’re younger than 59-½ and you tap the money, you face a 10% penalty and owe taxes on the funds.
Regardless of which option you choose, quick quitting may mean you’re leaving money behind, in terms of options or employer contributions that haven’t had time to vest.
“This about the employee match. That’s often a huge selling point for compensation, but you might not be eligible if you’re moving too frequently and not there long enough to earn the match,” Kessler said.
Some employers offer plans in which you need to stay three to five years to get a full company match. Some companies use “cliff vesting,” where employees receive ownership of a match on a specific vesting date, rather than receiving a portion of them gradually.
“Leaving more frequently means you might miss out on the match,” Kessler said.
Also, if you leave jobs frequently, you need to keep track of your contributions so you don’t overfund your 401(k) for any given year, Kessler said.
Regardless of how you choose to move the funds, advisers agreed that leaving behind a 401(k) can be risky. As of May 2021, there were 24.3 million forgotten 401(k)s holding about $1.35 trillion in assets, with another 2.8 million accounts left behind annually, according to Capitalize.
“The biggest mistake we see is people leaving behind an account at an old employer. You’d be surprised how many people say ‘I don’t even know if that company is still in business.’ We tell everyone: ‘Please get it out. Do it now. Because you’ll forget about it and it will be forgotten,’” Milan said.