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Cash out or keep saving: Retirement plans and changing jobs

Many employees choose to cash out their retirement plans rather than roll the funds into a new account when changing employers. Not only is this a bad idea, it happens at an alarming rate.

According to a study last July by Hewitt Associates, 45 percent of participants in retirement plans, such as a 401(k), elected cash distributions when they left their jobs. The most likely to cash out of plans are workers in their 20s and those with balances of less than $10,000. Another study conducted in December by the Employee Benefit Research Institute (EBRI) found only 43 percent of lump-sum distributions were rolled over into an IRA or another retirement savings vehicle.

You can help employees understand their options so they can make educated decisions about their retirement savings plan.

The rollover reasons
When switching companies, employees have three options for their retirement plans. They can leave the money in the account, roll it over to a different account or cash it out. But there are good reasons for employees to use the rollover option:

• Taking a lump sum distribution is costly. There can be significant tax consequences when withdrawing retirement savings. Savings are accumulated on a pretax basis so distributions are fully taxable. In addition, there may be early withdrawal penalties for participants under the age of 59½.
• Avoid losing track of investments. It can be difficult to keep track of participants once they've terminated employment. It can also be cumbersome for the participant to keep track of investments that are held with many different financial institutions. Rolling funds into a new retirement account allows the participant to track all of their investments at a single financial institution.
• Lost flexibility. Many retirement plans allow employees to borrow against their 401(k) balance. However, in most cases former employers will not allow borrowing against the balance if the person is no longer an employee.

Let's roll
These are the most common options for rolling existing 401(k) funds into another account:

Roth IRA
A Roth IRA is a flexible retirement savings account for after-tax contributions that allows savings to grow over the years tax free. There are limits as to how much can be contributed each year and earnings must be left in the account until after age 59½ or distributions will be taxed. Some exceptions, such as withdrawing money to buy a home are not taxed. A Roth IRA offers more flexibility than a 401(k) because it can be invested in many different areas, from stocks and mutual funds to bonds and real estate. Since its creation in 1997, the average rate of return is about eight percent. The downside of rolling funds into a Roth IRA as an investment from a 401(k) plan is that pretax dollars will be taxed at the point of conversion.

New 401(k)
Rolling the previous 401(k) balance into a new 401(k) account might be the best option if the new plan offers low-cost investment options and if you want to borrow against the account, which can't be done with an IRA.

Roth 401(k)
The Roth 401(k) is similar to the Roth IRA in that contributions can be made on an after-tax basis, in addition to pretax contributions. The primary difference is that a Roth 401(k) allows the employer to contribute a pretax match of the employees' contributions -- and highly compensated employees are not restricted from contributing. Ceridian offers both Roth 401(k) services and pretax 401(k) services.

Retirement plan fund rollover services
You can provide an invaluable service to your employees by offering retirement plan fund rollover services. Terminated and retired employees can benefit from a solution that assists them with their rollover. Rolling funds into a new retirement account allows the participant to track all of their investments at a single financial institution.

Ceridian helps employees streamline the process of rolling over their retirement plan funds. Working with Wealth Management Systems, Inc. (WMSI), Ceridian Rollover Solutions Network can provide your current, retired and terminated employees access to a selection of IRA and annuity providers. Ceridian will help them address retirement planning needs and relieve your staff from administrative burdens.

The process is simple. Employees have access to an online self-service Web site where they can choose between IRA providers including Ameritrade, American Century and Fidelity. E*TRADE will also soon become a provider and Hueler Investments will be added to provide an annuity option. For those plans that use Merrill Lynch as custodian, Merrill Lynch is the IRA provider. Once a provider is selected, a simple online process helps participants set up their rollover.

For more information on Ceridian Rollover Solutions Network, contact your Ceridian representative.