401K and 403(b) Plans Explained

Company sponsored retirement plans, such as the 401K, are becoming an increasingly important component of the retirement planning process.

Has your current financial advisor explained to you the various components of your 401(K) or 403(b) plan?

401(K) plans are one of the most common retirement plan types. A 401K plan offers eligible employees an opportunity to establish an investment account and allows the employer to deposit funds deducted from employee paychecks. Once deposited into the account most plans offer a variety of money management choices such as mutual funds, stocks, bonds, and cash. At the employers discretion a plan can operate pre-tax as a Traditional 401K or post-tax as a Roth 401K.

Additionally, employers have the option to make contributions into employee accounts in the form of matching contributions (for active participants only) or non-elective contributions (all eligible employees receive same contribution).

Collectively, these contributions can add up to a substantial amount and creates a tremendous amount of tax savings.

Just to clarify, a 403(b) plan is also a qualified retirement plan that is offered to employees of hospitals, higher-education institutions, and non-profit companies and organizations.  Each 403(b) plan can be compared to various 401(K) plans, because they share similar characteristics: i.e. contribution limitations, various tax exempt rules, withdrawal penalties, and investment alternatives.

It is highly recommended to conduct an annual review [at the very least] of your company’s retirement plan with your financial advisor or financial planning firm — to learn how to get the most out of your plan.

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A chance to take control of the employer sponsored retirement account you left behind!

With Americans changing jobs every 2-4 years it presents an opportunity to revisit and consolidate retirement account assets i.e. 401K, 403B, Simple IRA and Defined Benefit plans. Without formal instruction given to the previous employer, retirement accounts are often left in the pre-existing status with no proactive advice from the employer or financial advisor.  This can make account maintenance and investing cumbersome.  Once a change of employment occurs the opportunity to Take It, Roll It or Leave It comes alive!  This is your chance to take full authority of retirement account assets.

Take It:
By taking it a request is made by account owners to the previous employer for full liquidation and distribution of assets held in the retirement account.

Formal documentation, called distribution paperwork, will require the owner’s consent (signature) to pay the appropriate federal and state income taxes. Additionally, if the assets are distributed prior to the age of 59 ½ a 10% pre-mature withdrawal penalty is assessed. The bottom line: taxes combined with penalties significantly reduce the net amount received!  Use this option as a last resort for accessing money.  If forced to use this option try to make the distribution during a year in which you will be in a lower tax bracket softening the blow.

Roll It:
For those who want to maintain the tax advantages of the existing retirement account, roll the old retirement plan assets into a Self-Directed IRA with the help of a qualified financial advisor or into a retirement plan sponsored by your new employer.

Formal documentation, called distribution paperwork is required to make this transaction possible. However, some plan administrators recently have allowed telephone and/or internet directed rollovers. If it matters, check to see if there is an option to roll assets “like-kind” or in cash. “Like-Kind” allows previously held investments to transfer without change into the new investment firm (“The Custodian”).  Usually, like-kind transfers are available when rolling into a Self-Directed IRA account. Double check with the outgoing and receiving custodians prior to this type of transaction to make sure it is possible. Cash rollovers are the most common, especially, for those rolling into a new retirement plan. For the most efficient rollover, first open the new Self-Directed IRA or Retirement Plan account and then request the rollover from the old plan. Rollovers to Self-Directed IRAs allow investors the widest range of investments and an opportunity to work with their financial advisor. 

Leave It:
Let the existing plan assets stay where they are and do nothing — if the old plan had everything you needed; including a wide array of investments, good service and acceptable performance. In some cases, smaller account balances (<$5,000) can be forced out of the plan.  Considering that employers change plan administrators and investment menus often – ”doing nothing” can become a real challenge if you need to track down the account sometime in the future.  Don’t expect the firm who previously handled the plan to still be there.

Find a knowledgeable investment advisor or financial advisor to help consolidate retirement accounts into one concise account. This will streamline investment activity, help reduce expenses, reduce account maintenance and ease the ability to monitor investment performance.

Remember to keep primary and contingent beneficiary designations (who the $ goes to if you pass away) updated no matter what you decide!

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