Wednesday, July 20, 2011

Retirement Plan Clean-up

Unlike cleaning up some of the small things that can have great effect, cleaning up a retirement plan is not so easy. And unlike the stat I mentioned on homeownership previously (how 80% of will be in the same house 10-years from now) we change jobs far more more frequently. And for the vast majority of us, this is why we sell our homes.
Looking back, you probably have had numerous jobs, some which you stayed at for more than five years. It usually takes a person that long to become dissatisfied enough to earnestly begin looking elsewhere. Add to that the current job market, which may have pushed you to stay longer than you would have liked. And when you did, you might have money left behind.

During that five years, you became vested in the 401(k) plan. This process of setting a timeline for when those company matches actually match is considered reasonable by law. You may have been enrolled through auto-enrollment and had contributions made on your behalf. Perhaps you made some yourself. That money should come with you. And often it doesn't.

Small companies are often as sloppy with their accounts as you are. If your account reached a certain balance, it might not send a red flag to the plan sponsor to cash you out. Cashing out, I should mention just because I brought it up, is not a good idea for even the smallest amount of money. Under 59 1/2 and you not only pay income tax but a 10% penalty - if you don't roll it into an IRA.

And this is why, even if they still have your money in their accounts, you should roll it over as well. IRAs have two distinct benefits for most retirement planners (not the professional kind, I'm referring to you), the first of which is much more favorable terms for distribution (eventually that 401(k) at retirement will do exactly the same thing: give you a lump sum). And secondly, in many instances, the fees are far less.

That doesn't mean all the fees. But the fees for the 401(k) plan itself which as it turns out, are the real culprits in the battle to have enough to retire. Many plans have shown major improvements in fund selection and investment options. Many more, particularly the plans at smaller companies, have a long way to go. Yet as the funds got cheaper, the administrative costs may have actually risen.

Yes there is an outcry about these costs and most people will tell you to pay attention and even question the plan about these costs. Few will get much in the way of relief though. It costs money to run these plans and unfortunately, the smaller plans have less participation and participation lowers fees. The more money under management, the lower the cost of administering the plan.

So recover those orphan plans and do it as soon as possible. Where you roll it to is not that difficult. Most plan sponsors will offer you options from the same fund family and will facilitate the process. Once you leave though, this door may be closed. You get the money but it would be up to you where to put it.

Wherever it goes, choose the lowest cost option that would still keep you invested, something like an index fund. You may already been re-employed and beginning to vest in another plan. And if that's the case, you will want to keep what fees you do have control over as low as possible.

The other quick fix to your retirement comes with a quick fix to your personal finances. Why do you suppose 28% of 401(k) plan participants have borrowed against their 401(k)s? Is it because they get a no credit check loan at very reasonable rates? Is it because you essentially pay yourself the interest? Is it because of you don't lose your job before you pay it off, it becomes a no-harm no-foul? While each of those answers does suggest that 401(k)s are good for quick emergency loans, they shouldn't be touched.

Do you suppose that of those 28% with outstanding loans, all of them had emergency accounts? Probably not and the 401(k), their precious future livelihood was their only source for cash in times of trouble. An emergency account is not that tough to build and worth the effort even if it does create some sacrifice.

Most financial sages suggest three to six months but suggest it be at your current spending. Done correctly, with everything pared back as far as possible, a single month's worth of emergency cash might actually be worth two additional weeks. So six months might actually get you by as long as nine.

Doing so requires that you figure how much needs to go out (absolutely needs to go out) each month to keep a roof over your head and food on the table. It requires a budget. But one quick glance is about all you need to see all of the additional holes that could be filling up your emergency account, the single most important stopgap measure you could have.

Doing these two things - and continuing to contribute to your plan on a regular basis - will give you a boost that was just waiting to happen.

Paul Petillo is the managing editor of and a fellow Boomer

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