Trends come and go, but one trend that seems to be continuing is job-hopping. It wasn’t too long ago that the American Dream involved getting on with a company, working for 40 years or so, and retiring with a defined-benefit plan such as a pension.
Today’s graduates routinely change jobs several times in their first 10 years in the workforce. Some studies estimate that Millennials will hold between 12 and 15 jobs in their lifetime. Plus, fewer and fewer companies are offering pensions these days and are instead migrating to 401(k) and other defined contribution plans.
All this labor mobility has plenty of benefits such as flexibility and workplace efficiency, but how might this job-hopping trend be affecting retirement savings trends? Here are three considerations:
- Amount of retirement savings. Under a defined-benefit scheme such as a pension, little regard was often paid to the benefit amount. "I will work hard until I retire," so the thinking went, "and then the company will take care of me." But under a defined contribution plan, you have the power to contribute an amount up to the limit. Are you saving enough?
- Fees. With a pension, administrative costs, fees, and even transaction costs are typically beyond the control of plan participants. With a 401(k) plan, controlling fees can be an important part of your strategy.
- Rollovers. The 40-year company employee who never changed jobs likely did not need to worry as much about multiple retirement accounts possibly held at different places. The job-hopping set needs to keep track of the money.
Read on for more on these three considerations, and why they matter, as you hop along your career path.
Are You Saving Enough for Retirement?
If you’re like most Americans with 401(k)s, chances are the answer is “not likely.”
The Plan Sponsor Council of America, a trade group representing employers who offer retirement plans, said in December that the average salary deferral (pre- and after-tax) for all eligible participants in retirement plans was 6.8%.
That’s a far cry from the 15% recommended by the Center for Retirement Research as the amount sufficient to achieve retirement income targets. The good news is there are many online retirement calculators that give ballpark estimates of how much to sock away. By plugging in your current age, desired retirement age, current income, current savings rate, and a few other numbers, these calculators can estimate amounts to consider to contribute as you aim for your retirement goals.
Better yet, consider making retirement goal planning part of an overall financial plan.
Fees Take A Bite
But watch those fees. The U.S. Department of Labor, which mandated greater fee transparency in retirement plans, did the math, and published it in its 2013 report, A Look at 401(k) Plan Fees. From the report:
“Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7% and fees and expenses reduce your average returns by 0.5%, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5%, however, your account balance will grow to only $163,000. The 1% difference in fees and expenses would reduce your account balance at retirement by 28%.”
How can you tell if your plan has high fees or low fees? Morningstar’s retirement expert Christine Benz said there are two sets of plan fees: the fees associated with the specific investment choices and total administrative costs. The fees for investment choices should be easy to find, while the administrative costs are in a document called the Summary Plan Description. How much is too much? Benz says, for an equity fund, a high-cost plan is one that charges above 1% in annual costs related to specific investment choices. For a bond fund, the rule-of-thumb is 0.75% annually. And for those administrative costs, she says plans with administrative costs over 0.5% annually are generally considered expensive.
Get On a Roll (Over)
Have you joined the job-hopping set? You can make sure your money follows you, or at least you know where it is. When leaving an employer, consider boxing up both your belongings and your 401(k). To keep your retirement money growing, one choice is a rollover into an IRA. An IRA custodian can walk you through how to request the distribution from your 401(k) plan administrator to transfer the funds. The two most common types of IRAs involved with a rollover are the Roth IRA and the Traditional IRA. Each has its own advantages, and the IRA custodian can explain the choices you have. To find out more about your options when leaving your employer, visit TD Ameritrade's Rollover IRA page.
A big reason to roll over your 401(k) instead of cashing out? Taxes. By rolling over the funds directly into an IRA versus cashing out, you avoid a mandatory 20% withholding for federal taxes, plus potential state and local taxes. Those under age 59 1/2 who cash out will also lose another 10% due to an early withdrawal penalty (except under certain specific exceptions).
Experiencing different companies, and even different careers, can be fun and liberating, but consider the impact on your money and investments as you hop along.
Help Is a Hop, Skip, and Jump Away
Get up to $600 when you roll over your old 401(k) with TD Ameritrade, depending on the size of your deposit.