Deciding What to Do with Your 401(k) at Retirement
When it comes time to retire, a critical choice for workers is what to do with their 401(k) savings. Should you keep the money in your employer’s plan, or roll it over into a personal account?
Companies have begun to enhance their 401(k) offerings, making it more appealing for retirees to leave their funds in place. They’re introducing features like improved withdrawal options and annuity choices, all aimed at easing the transition from accumulating savings to drawing them down in retirement.
Craig Copeland from the Employee Benefit Research Institute suggests that keeping retirees with larger balances in 401(k) plans is beneficial for companies. More assets can help lower costs for both the plan administrators and participants. Essentially, a higher balance spreads out costs more effectively.
Concerns About Financial Security
With around 11,000 individuals reaching age 65 daily, a notable demographic shift is underway—the largest cohort of Americans at this age in history. This trend is expected to continue, with about 4.1 million hitting that milestone from 2024 to 2027, as per the Lifetime Income Alliance.
More retirees nowadays have 401(k) plans instead of traditional pensions, which used to provide a steady post-retirement income. Recent research from Vanguard indicates that older workers, particularly those aged 55 and up, are more inclined to handle their retirement investments independently, rather than seeking professional advice. Half of these older workers are individual investors, and they usually hold larger averages—about $420,000 in their accounts. This cohort is thus often making important decisions regarding their 401(k) funds.
However, fear of insufficient income is widespread. A BlackRock study reveals that 66% of savers are anxious about outliving their funds, and a striking 93% desire guaranteed income during retirement.
Individuals can roll over their 401(k) money into an IRA, which requires either self-management of assets or hiring a professional for guidance. Experts recommend weighing several factors, like available investment options and associated fees, before making such a move.
Interestingly, many retirees may not realize they can leave their funds in a 401(k). A study found that over half of participants aren’t aware they are not obligated to move their money around.
What About Smaller Accounts?
While most plans allow retirees to retain their assets, around 2% of plans require participants to relocate their funds by age 65 or 70. This statistic has remained relatively low over the years. However, small accounts often face different rules; many plans may close accounts below $1,000 and issue checks to former employees. If those funds aren’t funneled into another qualifying retirement account, they could face taxes and potential early withdrawal penalties.
A common understanding is that a penalty of 10% applies if you’re under age 59½. Still, there’s a provision in 401(k) plans that allows withdrawals starting at 55 if you retire in that year. Notably, employers can roll over balances below $7,000 into an IRA.
New Payment Options in 401(k) Plans
In recent developments, 68% of 401(k) plans permitted retirees to set up consistent payment plans from their accounts. Additionally, 43% offered temporary cash distributions, marking an increase since 2015. If a plan doesn’t allow these options, retirees must choose between withdrawing or rolling over the entire balance if they wish to access their funds.
That said, even if you have these options, there might be limitations. For instance, some plans don’t allow you to select specific funds for withdrawal, which can complicate matters. In contrast, with an IRA, retirees can choose which investments to sell, potentially allowing more effective portfolio management.
Emerging Annuity Options
Recently, a number of 401(k) plans started integrating annuities to provide guaranteed income for retirees. Annuities can involve an investment aspect, typically served as contracts with insurance companies that promise consistent payments over extended periods. The 2019 SECURE Act aimed to relieve concerns about companies’ legal risks if their selected annuity providers fail to deliver.
Despite these efforts, the number of 401(k) plans that currently offer any form of pensions is still modest. There are plans that include standalone annuity options, while others are pairing annuities with target date funds. These funds are designed to allocate portions of assets toward future annuity purchases while gradually shifting toward lower-risk investments as retirement approaches.
Nevertheless, as of now, only about $29 billion is invested in these funds, a tiny fraction of the over $4 trillion committed to target-date strategies. Experts note that while the option exists, beneficiaries must consciously decide to use their funds for these pensions. Until we understand how retirees utilize these options, their true advantages remain uncertain.
