Should You Keep Your 401(k) with Your Employer After Retirement?

Companies are adapting to an aging workforce and the lingering impact of elevated inflation over the past three years by adjusting options within their retirement plans, as indicated by surveys conducted by global asset manager MFS Investment Management.

Six out of ten retirement savers expressed concerns that inflation could affect their savings, with 61% of over 4,000 plan participants surveyed by MFS indicating a shift towards more conservative investing strategies.

Conversely, among the 140 plan sponsors surveyed, 45% reported making or considering changes to their fixed income offerings, while 35% mentioned adjustments to inflation-protected options.

“There is a noticeable increase in retirement anxieties due to persistent inflation and economic uncertainties, and plan sponsors are responding promptly,” noted Jeri Savage, MFS lead retirement strategist.

Why do employers encourage retirees to remain in their retirement plans? With increased account balances as employees age, companies gain purchasing power.

“As participants accumulate larger balances with age, this creates scale for the plan,” explained Savage. This scale allows companies to negotiate better fees, improve investing options, and enhance services, benefiting retirees and current employees alike.

“It’s also paternalistic,” Savage added. “Staying in the plan can provide better outcomes for participants than managing retirement savings independently.”

A 2018 study by market researcher Cerulli Associates revealed that many workers were uncertain about managing their 401(k) savings after retirement.

Do employees typically retain their company retirement plans? Usually not.

According to Vanguard, within five years of leaving a company, 52% of workers roll their retirement savings into an individual retirement account (IRA), while 31% cash out, leaving only 17% who remain in the company plan.

“However, plans offering flexible distributions tend to retain more retirement-age participants and assets,” Vanguard’s report highlighted. The prevalence of such features has nearly doubled in the past five years, reflecting growing demand for retiree-friendly plan designs, in-plan advice, and retirement income solutions.

Is it advantageous to keep funds in a 401(k) after retiring? It depends on several factors, experts advise.

Considerations include:

• Fees: While employed, the company often covers some fees; upon retirement, these costs typically shift to the retiree. Larger plan assets can result in lower fees compared to an IRA.
• Investment Options: Companies are increasingly offering investment choices like short-term bonds, Treasury Inflation-Protected Securities, and stable-value funds, aligning more closely with retirees’ needs compared to the past.
• Access to Funds: Retirees leaving the company at age 55 or older may withdraw from a 401(k) without penalty under the IRS Rule of 55, whereas IRA withdrawals generally require waiting until age 59-1/2. Both account types are subject to taxation on withdrawals, excluding Roth accounts.

Other considerations:

• Creditor Protections: Company retirement plans often offer better safeguards from creditors and lawsuits compared to IRAs, though protections vary by state.
• Control: Retaining funds in a company plan means the employer controls changes to investment options, plan administration, and record-keeping. Changes such as mergers, plan sponsor changes, or bankruptcy can affect fund management and oversight.

How many people overlook their 401(k) accounts? As of May 2021, estimates from Capitalize suggest there were 24.3 million forgotten 401(k) accounts holding approximately $1.35 trillion in assets. Each year, an additional 2.8 million accounts are abandoned by individuals leaving their jobs.

“When you leave a job, you pack up your desk and take your things,” remarked Primavera. “Why leave behind your savings? It’s likely one of your largest assets, akin to your home.”