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What Happens to Your 401(k) When You Change Jobs?

Since the beginning of Her First $100K™, we have been creating content for women to give them the confidence and resources they need in order to attract their ideal roles, negotiate their desired salaries and benefits, and advocate for themselves in the workplace. 

It has been amazing to witness firsthand how many women within our community are taking the information they find at HFK and using it to advance in their careers. We couldn’t be more proud!

But while we are celebrating the millions of people landing awesome new jobs, we are also mourning the millions of 401(k)s that are getting lost in the process. Whether they are sitting in low-yield accounts, being heavily taxed upon early withdrawal, or are forgotten about entirely, millions of 401(k)s are being neglected, resulting in TRILLIONS of dollars of lost retirement savings.

Here at HFK, we believe that being adequately prepared for retirement is of the utmost importance, so today we are diving into the basics of a 401(k), breaking down your options for your 401(k) when you change jobs, and giving you the resources you need to make your choice confidently and smoothly. 

Are you currently navigating the job market? Want to stand out from the crowd, attract employers, and approach every interview with confidence? Our Job Interview Package will give you the competitive edge so that you can land your dream job and take the next step in your career and life!

What is a 401(k)?

A 401(k) is one of the most popular retirement savings plans for Americans with over 60 million active participants in 2020. 

401(k)s are employer-sponsored, meaning that you only have access to a 401(k) through an employer and the account is both created and managed by the employer. Your 401(k) is funded with pre-tax wages that are taken directly from your paycheck each pay period, and many employers will “match” a portion of your savings (yay free money!). 

This structure makes saving for retirement accessible, fully automated, and seemingly effortless to manage – that is until it comes time to change jobs. *insert dramatic DUN DUN DUN music here*

Does this information apply to 403(b) accounts as well?

We are so glad you asked — YES! A 403(b) is also an employer-sponsored retirement savings plan. The main difference between a 401(k) and a 403(b) is the type of employer that offers these plans.

While 401(k)s are offered by privately owned, for-profit companies, 403(b)s are offered by tax-exempt employers such as religious organizations, public schools, hospitals, etc.

We primarily refer to 401(k)s in this blog post, but please note that this information applies to a 403(b) as well.

What happens to your 401(k) when you switch jobs?

Because your 401(k) is employer-sponsored, when you go through a career change, your 401(k) does not automatically follow you to your next job. 

You have four options of what to do with your 401(k) when you change jobs:

1. Cash it out

2. Leave it with your previous employer

3. Transfer it to your new employer

4. Roll it over to an IRA

Let’s break these options down so you can make the choice that is best for you and your financial future.

Should you cash out your 401(k)?

If you have a small amount of money in your 401(k), you may choose to cash it out when you secure a new job. That’s right, you can cash out your 401(k) for a lump sum anytime you want. 

Now, that’s not to say that there won’t be stipulations: you will have to pay regular income taxes on the cash as well as a 10% tax penalty if you are below age 55. Plus, you will be reducing your retirement savings unnecessarily, and with most people needing to save over $1.8 million for retirement, you want to preserve every dollar of your 401(k).

Of course, if you find yourself without other financial means or in a toxic/dangerous situation that requires immediate liquidity, cashing out your 401(k) is an available option. But if possible, we would strongly recommend going another route to preserve your retirement savings.

Should you leave your 401(k) with a previous employer?

Many people choose to leave their 401(k) under the management of their previous employer as this option requires no effort on the employee’s part – an extremely appealing factor when you are in the hustle and bustle of starting a new job.

But we tend to think of leaving your 401(k) under the management of your previous employer like leaving your retirement savings in the hands of your ex: it’s a little awkward, they may not have your best interest at heart, and it’s easy to fall out of touch.

Communication may be difficult

Now when it comes to your retirement savings, it’s important that you can stay up-to-date on the way things are going. Information about your 401(k) needs to be readily available and easily accessible so that you can see how it is growing and plan for your financial future. Consistently reaching out to a previous employer for updates on your 401(k) may feel awkward, especially if things didn’t end on the best terms.

They may not have your best interest in mind

Speaking of ending things on less-than-great terms, your previous employer may not have your best interest in mind when it comes to your 401(k). When you leave a 401(k) in the hands of a previous employer, you are allowing them to manage your investment and you are trusting that they will do so in a way that benefits you.

And while this option is easy peasy and requires no effort on your part, there is always the risk that your employer will manage your account in a way that does not yield the highest return.

In fact, according to a study conducted by our valued partner, Capitalize, between 2010 and 2019, an average of 13% of 401(k)’s defaulted to a low-yield fund that had an average return of only 1-3%. When you consider that a diverse and mindfully-invested account can see returns between 9-14%, the risk of getting stuck in a low-yield investment becomes that much more menacing.

You may lose track of your investment

Look, you already have a lot going on. Most of us can barely remember to call up that old friend to schedule a dinner date, let alone check in with a previous employer yearly to make sure that our 401(k) is still chugging along.

This becomes especially difficult when you consider that the average person will change jobs 12 times in their lifetime. That means 12 different 401(k)s all with different employers, invested in different places, and needing to be rebalanced every year. See how it could get easy to lose track of an investment or two?

Losing track of a 401(k) is completely avoidable, and yet Capitalize estimates that, as of 2021, an estimated 24.3 MILLION 401(k)’s with $1.35 TRILLION in assets have been completely forgotten by job changers. 

So just like with an ex, we prefer a clean break and don’t typically recommend leaving your 401(k) with a previous employer. If you really like the fees you pay and the investments that are available through a previous employer’s plan, then, by all means, allow them to continue to manage your account, but be aware that there are certain risks involved.

Should you transfer your 401(k) to your new employer’s plan?

There is always the option to transfer your existing 401(k) into your new employer’s plan, if available. 

This could be a particularly good option if you like the fees and investments available with your current employer’s 401(k) program and would prefer a “hands-off” management approach. 

Once you have worked at your new employer for a few weeks (most employers have a “minimum number of days worked” requirement before their 401(k) plan becomes available to employees), you can initiate the transfer process. Simply request that the administrator of your previous 401(k) deposit the balance of your account into your new account, sign some paperwork, and you will be on your merry way.

That is, of course, if you don’t mind paying the investment and administrative fees associated with employer-provided 401(k) plans. While these fees may seem insignificant, they can add up over time and result in the loss of a pretty serious chunk of change that could be going to your retirement.

Additionally, it is important to keep in mind that by choosing to transfer your balance into your new employer’s 401(k) plan, your investment options are limited to the investment selections of your employer. While many employers do a fine job of managing these investments, there is always the chance that their selections do not best align with your overall goals for your investment.

Should you roll your 401(k) into an IRA?

Here at HFK, we are all about getting the most bang for your buck, which is why we recommend rolling your previous 401(k) into an IRA.

An IRA (individual retirement account) is a tax-advantaged retirement savings account that allows you to personally select your investments to best reach your goals for your savings.

Not only do these accounts typically have lower maintenance and administrative fees than employer-provided 401(k)s, but they often have a wider selection of investment options so that you can find the offer that best fits your needs and goals.

But don’t worry, if managing your own retirement savings account sounds intimidating AF, you also have the option of selecting an “automated IRA” which will both create and automatically rebalance your IRA for you.

How to roll your 401(k) over to an IRA

Rolling your 401(k) over to an IRA is easier than ever with Capitalize.

Capitalize is a free concierge platform to find and transfer your old retirement accounts into an IRA of your choice. So not only do they manage your rollover, but they help you choose the IRA that best fits your needs and create a retirement plan that will maximize your savings and give you peace of mind.

This money tool is especially helpful for those of us who have changed jobs multiple times and have multiple 401(k)s floating around. Capitalize will locate all of them and make the rollover process a paperwork-free breeze.

Additionally, Capitalize allows you to roll your 401(k) or 403(b) into a Roth IRA – an account that can allow your retirement withdrawals to be tax-free.

So whether you just started a new job or are simply looking to proactively plan for your retirement, get started today with Capitalize and take control of your financial future.

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