Here's a
question: You've built up a massive nest egg at your job, and you're about to
retire. What are your plans for your hard-earned savings?
For nearly a
third of workers, the answer is "I don't know."
Those were
the findings from a recent survey by the Employee Benefit Research Institute, a
research group that focuses on health, savings and retirement. EBRI conducted
an online poll of 2,042 adults in January.
"In most
cases, you would expect people to do a couple of things: You wouldn't use all
of it to buy lifetime income and you'd want to keep some of it for
emergencies," said Craig Copeland, a senior research associated at EBRI.
"It's
troubling that they can't recognize what they think they'd be doing," he
said.
Here's why it
makes sense to develop an end-game for your 401(k) savings.
IRA versus
401(k)
Three in 10
workers said they would roll their 401(k) savings into an IRA, according to
EBRI. About a quarter said they would keep their money at work.
EBRI also
found that 1 in 3 retirees moved money out of their retirement plan because a
financial professional told them to do so.
Most
employees expect their retirement savings to be a major component of their
income once they've left the workplace. And moving that money could be risky
and expensive.
Money held in
a 401(k) is protected by the Employee Retirement Income Security Act or ERISA. This
federal law requires individuals who manage the plan to act as fiduciaries and
operate in the best interest of the participants.
Further,
ERISA protects your 401(k) savings from seizure by creditors.
You don't
have these same protections in IRAs.
Though the
Labor Department had released a rule that would require financial advisors to
operate in your best interest when handling your retirement savings, the agency
has backed off on enforcing the regulation.
That means
the advisors who roll over your assets may or may not be working in your
best interest. They might recommend investments that are inappropriate for your
circumstances or products that are too costly.
Further, once
you roll your money out of your 401(k), the extent to which your IRA is protected from creditors will vary based on the state in
which you reside.
Funds and
fees
When it comes
to investments, you likely have access to a broader array of investments in an
IRA. In a 401(k), you're limited to what your employer selects for the plan's
fund menu.
The average
large 401(k) plan in 2015 offered 29 investment options, according to data from
the Investment Company Institute.
Finally,
expenses are worth considering when you decide what to do with your savings.
Moving your money could save you money, or cost you big.
Overall,
retirement plan costs are falling.
While
advisors can charge approximately 1 percent to manage your rollover assets,
some small retirement plans have fees that exceed that amount.
For instance,
a study from America's Best 401k, a Scottsdale, Arizona-based firm that
works with retirement plans, reviewed fee disclosures for 11 insurers and
payroll companies that specialize in plans with less than $10 million in
assets.
Fees for
those plans were as high as 1.19 percent to 1.95 percent, according to the
analysis.
Where to
start
Don't wait
until the week before your retirement party to figure out what you should do
next with your savings. EBRI's Copeland has three suggestions for workers.
Know your options: Research the distribution choices available to you in your
workplace retirement plan. Generally, you have four choices: You can leave your money in the plan,
take payments from the plan in installments, roll your money over to an
IRA or take a lump sum. You should also know that if you keep your cash in the plan or put the
money in an IRA, you'll be expected to take required minimum distributions
at age 70½.
Clear the decks of debt: Aggressively pay off
any high-interest debt while you're employed. Talk to your financial
advisor as to whether it makes sense to pay off your mortgage.
"Make sure that your current situation is good," said Copeland.
"Get your debt taken care of. In a sense, not worrying about your
mortgage every month is a stress reliever."
- Map out your expenses: At the end of the day,
you still have to budget and stretch your savings. Calculate what you need
each month and see how it squares against your retirement income sources,
including Social Security.
Click here for the original article from CNBC.