Gen Z is expected to change jobs quite frequently. Zurich Insurance Group estimates that Gen Z might change jobs up to TEN times from age 18-34.
Pair this with the fact that Capitalize did a study that found 31.9 million retirement accounts to be “forgotten,” with a total balance of over $2,000,000,000,000. Yes, that is 2 trillion, with a ‘t’.
I don’t have the data to back it, but I would bet that the more frequently someone were to change jobs, the higher chance they forget about one of their retirement accounts.
With Gen Z projected to change jobs quite frequently, I thought it would be good to go over all of the options available when it comes to their retirement accounts or 401(k) plans.
There are generally 4 different ways to go about an old retirement plan. Some may be more optimal than others, depending on an individual’s position. This is due to the fact that in many cases, it will depend. (That’s a joke btw. It always depends.)
Option 1: Leave it within the old plan.
I will caveat this with the fact that balances below $7,000 in 401(k)s or 403(b)s can be automatically rolled into an IRA without the consent of the employee. This can throw a wrench into other planning tactics, such as annual Roth conversions if the balance is rolled to a Traditional IRA.
I urge young professionals to stay on top of their retirement accounts. The last thing anyone wants to learn is that they facilitated Roth conversions on an annual basis, but an old employer rolled their 401(k) to a Traditional IRA, and each of those conversions were a taxable event.
Back to the main point here: If the balance is above $7,000, there should be no issue leaving the funds in the plan. However, this may pose difficulty for tracking and organizational purposes. Many find a lot of value in consolidating retirement accounts for this sole reason.
Additional side note: Some 401(k) plans allow for loans. Consolidating a balance from an old plan may allow for more borrowing capacity (up to $50,000) in a new plan.
Option 2: Roll the funds into a new employer plan
In my experience, this is the most common avenue to consolidating retirement assets. Essentially, all of the vested funds in the old plan can be rolled over to the new plan.
This is done by way of direct rollover. A check will be cut for the benefit of the participant and deposited to the new plan on their behalf.
Seems simple enough, but this can arguably be the path of most resistance. Generally speaking, the rollover process is wildly outdated.
Usually, a phone call must be made to the current employer to understand how to make the check payable and where to send it for deposit to the new plan. From there, the check will likely be sent via snail mail. Then the employee must forward the check to the new custodian.
While this is the most common option I see personally, I know that it is not necessarily easy for many young professionals to carve out an hour of their day to take care of this.
I don’t know the exact number of rollover calls I have joined, but I am confident that it is hundreds of them at this point. Each and every time, I am reminded of why people don’t bother to initiate a rollover to begin with.
That being said, rolling the funds to a new plan can allow for consolidation amongst retirement assets, AND it can leave a Traditional IRA out of the picture. This is huge for those high-earners looking to facilitate annual Roth conversions without incurring taxes.
Option 3: Roll the funds into an IRA
An Individual Retirement Account is just that, a retirement account at the individual level. This is completely removed from any company-sponsored plan.
This can be a solid option for those in retirement. However, for those who are not, especially high-earners, this rollover may complicate Roth conversions on an annual basis.
Roth conversions generally entail an after-tax contribution to a Traditional IRA, and then converting those funds to a Roth IRA. We won’t get too deep into the weeds on the mechanics, but any pre-tax balance within an IRA that is converted can result in a taxable event. This is due to what’s called the “Pro-rata Rule.”
For most high earners, the last thing they are looking for is more taxable events. When looking to take advantage of annual Roth conversions without the tax bite, rolling to a new employer plan is usually the avenue that is most optimal.
Option 4: Cash out the account
Like nails on a chalkboard to a financial advisor, this option is usually not the best course of action.
This will result in the entire balance (if all pre-tax) being subject to taxes and if someone is below the age of 59.5, an additional 10% early distribution penalty may be applicable.
401(k)s are generally earmarked for retirement and taking a full distribution can be a nightmare of a taxable event. I’d never say never, but I am hard-pressed to find a scenario in which this would be the best course of action.
To close this out, I hope that with all the potential changes to employment, Gen Z takes special care of their retirement funds. Working hard and saving is such an awesome thing. Tracking these accounts to ensure they don’t get forgotten is incredibly important.
I know how crazy it might seem to forget about one’s hard-earned retirement savings, but it happens! Life happens!
Always know your options for retirement funds when it comes to changing employers.
This is for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of publication and are subject to change without notice. Past performance is not indicative of future results.