Think about the last time you received a job offer. Did you compare the pros and cons of accepting the new position? Perhaps you evaluated the differences in compensation, vacation time, and the cost of health care. Did you remember to include the cost of benefits you were leaving behind?
I didn’t... until I made a costly 401(k) mistake.
I left my job on a Wednesday afternoon, after three years and 364 days in that position. If I had just worked through Thursday and hit 4 years of service -- a mere 24 hours later -- my 401(k) would have been fully vested. I left nearly $3,000 on the table!
When I realized my mistake, months after the fact, it was far too late to make a correction. However, you can avoid making the same mistake and other silly blunders. All you need to do is arm yourself with the facts needed to make an informed decision.
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Here are five steps you should take before leaving a job with a 401(k):
1. Calculate the total amount your current employer has contributed to your 401(k)
If your retirement plan offers a matching benefit, it means that your employer contributes money towards your 401(k) account based on specific rules documented in your plan.
Occasionally, employers will contribute a percentage of your salary regardless of whether you contribute yourself. Other plans dictate that an employer match dollar-for-dollar up to a percentage of your salary. Some may match 50 cents on the dollar for the first 3% up to 6% of your salary. The bottom line? Every plan is different.
In order to determine your benefit, you should review your plan document or consult with your benefits department. The total dollar amount contributed by your employers is on your 401(k) statement. If you don’t have a recent copy or an online account, contact your plans customer service department or your company’s benefits department for help.
It can be easy to forget, though, when contemplating a new job (especially one that’s drawing you in with a higher salary). The value of matched contributions is a great benefit that should be included when you calculate your salary and employment package.
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2. Determine the percentage you are currently vested in your 401k
Next, find out how much of your employer match is vested. Vesting is fancy terminology for the percentage of money you get to keep. Plans often incentivize employees to stay by increasing the amount of guaranteed contributions with longevity of service. The retained value of employer match contributions is dictated by the vesting schedule documented in your benefits plan.
Example Vesting Schedule:
|Length of Employment||Percent Vested|
|<1 Year of Service||0%|
|1-2 Years of Service||25%|
|2-3 Years of Service||50%|
|3-4 Years of Service||75%|
|>4 Years of Service||100%|
Let’s say you’ve worked at your company for nearly 3 years, and your current 401(k) balance says $30,000. During last the few years, you contributed $20,000 to your 401(k) and your employer has generously matched $10,000.
If you left today, 50% is vested. This means that you would get to keep $5,000 of the money your employer matched, and all $20,000 of the money you contributed. In total, you would retain $25,000 of the $30,000 balance.
You can validate your current vesting percentage on your 401k account statement. However, if you want to obtain the vesting schedule rules, read through your plan documents for details or consult with your benefits department.
The percentage you are vested may not sway your decision to leave a job, but it’s worth knowing how much of the matching contributions you are guaranteed to keep.
3. Figure out the date when you will cross the next vesting threshold
Use your plan’s vesting schedule to calculate when you will cross into the next threshold. To do this, you’ll need to know the date you started working.
Building on the example above, consider the following vesting scenarios:
|Start Date||End Date||Years of Service||Vesting Percentage||Amount of $10,000 match retained|
|A||June 1, 2015||May 26, 2018||2 Years 11 Months||50%||$5,000|
|B||June 1, 2015||June 3, 2018||3 Years||75%||$7,500|
In scenario A you leave your job a few days shy of your 3 year anniversary, while in B you leave a few days after your 3 year anniversary. By staying just one extra week, you’ve shifted in the 75% vesting threshold. In turn, you’ve increased the amount of money you get to keep by $2,500. I don’t know about you, but that’s worth one more week of my time.
What if you find that you are in a few days or a few weeks from a milestone like I was? Consider negotiating the start date at your new job, to align with the best scenario possible.
4. Find out if your 401(k) plan charges maintenance fees
Some plans, particularly small business plans, charge annual management fees. If your current 401(k) is charging you a flat fee for administration, you may want to consider alternative options that don’t have this added expense.
However, a small expense may be worth paying to make sure your 401(k) is properly managed. For instance, blooom is a robo-advisor for 401(k) accounts. With blooom, you can get a free analysis of your retirement plan and for $120 per year, blooom will manage your 401(k). This includes regularly adjusting your portfolio, expert financial help from blooom advisors and suspicious activity alerts to protect your account. blooom even finds hidden fees that you may not know you’re paying for. blooom works with any employer sponsored retirement plan and is currently the only robo-advisor available that specifically manages 401(k) accounts.
You could also decide to roll the money to your new company’s plan or to roll the money into an IRA. It’s a good idea to evaluate a variety of factors and consult a specialist before acting.
Fees will be published on your 401(k) statements and in plan documents. Or, consult with your benefits department to help you locate the information.
5. Determine if you have received the entire match you are owed.
If employers match contributions, they usually deposit their portion right away. However, sometimes your contribution rate exceeds the limit they can match per paycheck. This may happen if you frontload your account at the beginning of the year, or increase your match to catch up towards the end. On an annual basis, your employer will reconcile the difference with a true-up contribution. Find out whether your employer’s total match has been deposited, or if you need to wait.
Keep in mind that you may be charged a fee to close your 401(k) account. This is important if you think you are entitled to a true-up contribution. If so, wait until the contribution is posted before initiating a rollover, transfer or distribution. Otherwise, the true-up contribution will re-open your account and you’ll find yourself paying a second closing fee and doing twice the paperwork.
Leaving one job for another is a big decision, and shouldn’t be taken lightly. Be sure that you not only factor in your 401(k) and employer match when weighing your options, but determine if you’re leaving before taking advantage of all benefits due to you. If nothing else, learn from my mistake: make sure that you’re not resigning a mere day sooner than you should, leaving thousands of dollars in employer contributions on the table.
I’m still kicking myself in the butt for that one.