Once upon a very different time in the USA, many workers could expect to spend their entire careers with the same company. The idea was that if you did good work, advanced with the company, and remained loyal, you could look forward to stable wages, a solid pension, and maybe even a gold watch presented at your retirement party.
But we are in a different world now, in terms of workplace expectations. Many workers now have very different expectations for how long they expect—or even want—to remain with the same employer. More and more, the trend is toward greater workplace mobility as employees change jobs in order to obtain promotions, seek a different work/life balance, move to a more desirable location, or for many more reasons.
At the same time, most of us know that changing jobs means making a few adjustments: a new HR department, a different office culture, different responsibilities, and others. But another important difference is the new employer’s 401(k) plan—or other type of available employer sponsored retirement plan. To take full advantage of the plan, you need to understand how it differs from the plan you’re leaving behind at your previous job. Let’s take a look at a few of the most important questions you should be asking your HR department as you settle into your new position.
- Can I enroll in the 401(k) immediately? Different retirement plans have different plan provisions, including when a new employee can become eligible. If your new plan allows you to enroll immediately, then it certainly makes sense to immediately start deferring income into the plan. If the plan has an eligibility waiting period (i.e., 6 months), you might want to consider if you want to wait to save until the eligibility waiting period is up or if you want to continue to make tax-benefitted contributions. In this case, if you are not yet eligible for an employer sponsored retirement plan, an Individual Retirement Account (IRA) – traditional or Roth – may be your only option to save for retirement while receiving a potential tax benefit.
- Is there a Roth option? Both of the choices here—traditional or Roth—are tax-advantaged; the difference comes in when the money is taxed. With a traditional account, you get a reduction in your taxable income equal to the funds you deposit in the account. The funds grow free of taxation while in the account, and when you begin withdrawing the funds—presumably in retirement—you pay taxes on the amounts withdrawn at your ordinary income tax rate. Traditional accounts also have required minimum distributions (RMDs), which means that when you reach a certain age (73 for anyone born after 1949), you must withdraw a minimum amount each year. With a Roth account, you pay taxes on the money you deposit (i.e., there is no reduction in your taxable income), the funds grow with no taxation while in the account, and when you begin withdrawing the funds in retirement, you pay no income tax on the amounts withdrawn (assuming that the Roth portion was started 5 or more years prior to distribution and that the distribution doesn’t occur until after age 59 ½). Also, Roth accounts have no RMDs, starting in 2024.
- Are my payroll-deducted contributions matched by the company? The ability to receive “free money” in the form of employer-matched contributions to your plan is one of the best benefits of participating in a company-sponsored plan. Depending on the specific design of the plan, employers may match some or all of your contributions up to a certain percentage of your annual salary (some employers match up to a specific dollar amount maximum). So, if you earn $50,000 and your employer matches your contributions at 50% up to 6% of your annual compensation, you’ll be getting an extra $1,500 deposited into your account (assuming you are contributing at least that much yourself). The thing to keep in mind is that any amount of employer matching means “free” money in your account that came from your employer. (And by the way, tax-advantaged savings—especially with the convenience of payroll deduction—is probably the best way to build your retirement savings, with or without an employer match.)
- What is the vesting schedule? Each employer-sponsored plan has its own vesting schedule (the amount of time you must be in the plan before all the funds in the account belong to you). Funds that you deposit in the plan, either by rollover or through payroll deduction, are immediately vested. But plans with employer contributions may differ in their vesting requirements.
- What are the investment options? Here again, each plan can be different. Most company plans offer a choice of investment options for the funds in your account, including mutual funds of various types; exchange-traded funds (ETFs); and other types of assets. Depending on your level of experience, you may want to consult with a financial advisor before making a choice.
- How do I handle the rollover from my old plan? Ideally, you were making regular contributions to an employer-sponsored plan in which you were vested at your old job, which means that you’ve got a balance available for rollover to your new employer’s plan or to an IRA. It is certainly to your advantage to keep these funds in a tax-advantaged state. Your new employer can help you with the process of making a tax-free rollover into your new employer-sponsored plan. Typically, it is suggested to rollover monies from prior employer plans to your current plan. It is typically easier to track the amounts, the investments used, the overall allocation of the investments, etc. if all of your retirement assets are in one place. However, it is important to review and compare the costs between the old plan and the new plan as well as the diversification and performance of the investments offered in both plans.
- What kind of reporting is available? Your employer is required to maintain accurate records and regular reporting on your account and on the investment options you have chosen. They are also required to ensure that any fees or charges associated with managing the plan are competitive and reasonable. You will want to keep track of how your contributions are being handled and also of how the investments in your account are performing. Depending on the plan, you may also have access to online tools that can help you track and evaluate your account and your investments.
At JFS Wealth Advisors, we know that retirement funding is a key concern for many clients. We provide guidance for companies that want to offer competitive plans to attract and retain needed talent. To learn more, visit our website to read our article, “SECURE 2.0 Offers New Incentives for Small Businesses.”
Important Disclosure Information: Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JFS. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. JFS is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the JFS’ current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.jfswa.com.
