Retirement Savings Basics, Part 2: Managing Your 401(k) After a Layoff

Laid offIn the first of this three-part series on the dos and don'ts of retirement savings, I reviewed how to best manage a 401(k) or similar employer-offered benefit. But as today's companies continue to combat the tough economy by downsizing, this installment explores what to do with your employer-offered retirement plan if you lose your job. Here's what the experts advise:

1. Take a Deep Breath: "The first thing to do is relax," suggests Christopher Hickey, a financial adviser at Merrill Lynch (BAC) "Most people are going to switch jobs numerous times during their career. This is a normal process. You want to continue to keep your eye on the ball, and that's retirement."

2. Avoid Rash and Rushed Decisions: Obviously, losing your job is stressful, and sometimes, in the desire to get through the process of disentangling ourselves from our former employers as quickly as possible, we act rashly. It's important to counter that desire, and take your time to sort out your next steps regarding your benefits.

"Typically there's no rush," explains David Wray, president of the nonprofit group Profit-Sharing/401(k) Council of America. "If the amount is over $5,000, you can leave it with your former employer until age 65. What you need to do is take your time and determine what makes the best sense for you. And you do that by comparing the current plan arrangement and at least two IRA arrangements. Do a little spreadsheet, and look at the investment options and the fees. Some of these very, very, large plans have incredibly low fees, and you don't want to lose that if fees might be higher at an IRA. On the other hand, some fees at smaller companies might be higher. So, it's that combined with available investments. If you decide to roll it to an IRA, the company [you are moving the money to] will help you."

If you're uncertain of where to open a new account, start by talking to someone you trust. Ask friends or family members who they use. Also, review the offerings at the big mutual fund companies -- such as Vanguard, Fidelity, T. Rowe Price (TROW), Charles Schwab (SCHW) -- to get a sense for what's out there. And do your homework before turning to a broker, as they often charge higher fees.

Asking for help from a financial advisor3. Don't Be Afraid to Ask for Help: Managing your employer-offered benefits can be difficult in the best of circumstances, and dealing with the added stress of a job loss can complicate things significantly. But there's a lot at stake -- not only in your retirement account, but also with your other benefits. It's important to understand your options.

"These transitions can be a lot more complicated than they first appear," says Hickey. "You have to ask: What about my life insurance coverage that I had for free with the company? What happens to the match in my 401(k)? Do I get paid for my unused sick leave? Often, there are many levels of compensation. If you sit down with a professional, they're going to call the employer and ask about the benefits and make sure you don't make a mistake."

If you do decide to consult a financial planner, a financial adviser, or one of the many other professionals available for hire, do your research here too in order to make sure you select one who's credible. "The marketplace is littered with people that say that they're planners, but they're not necessarily an expert in all areas. They just have 'planner' on the door," cautions Hickey.

4. Don't Cash It In! "One of the biggest mistakes I see all the time, especially today because people change jobs quite often, is the person moves from job A to job B and a lot of times they just cash in the 401(k) and pay the taxes or penalties to help with the transition," says Joseph Montanaro, a financial planner at USAA. "They lose momentum as far as getting into the habit of retirement saving."

His suggestion: "If they've got good options with the new employer, roll the old employer's plan into the new plan, or set up an IRA and roll the old employer's plan into the IRA, and that becomes the hub for retirement saving. But don't cash it in. It doesn't seem like very much if they have just a few thousand accumulated and few hundred in penalties and taxes, but it's more the fact that they've started to build this nest egg. Don't eradicate it."

5. Know Your Rights: You have various legal protections for your 401(k). For example, if you lost your job as part of a company-wide downsizing in which at least 20% of the workforce was laid off, then you are part of a "partial termination" of the 401(k) plan, and are considered fully vested. Additionally, if you have been forced into early retirement and are less than 59½ years old, you may be able to do a 72T distribution to access portions of your 401(k) without paying the 10% penalty usually levied on early withdraws. Spouses also have legal protections and in some cases may have a legal claim to a portion of the 401(k).

Next up, in part 3, I review how to create your own retirement account if you are unemployed, self-employed, or otherwise don't have access to one through an employer.

Loren Berlin is a columnist at DailyFinance.com. She can be reached at loren.berlin@teamaol.com. You can follow her on Twitter @LorenBerlin, and become a fan on Facebook.

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bjw367

An article so informative it never should have been "published"

July 05 2011 at 8:06 PM Report abuse rate up rate down Reply
rolando4rocks

ANYBODY who puts all of their retirement into anything like a 401K/401B needs to have their head examined,and quickly.If they haven't seen the HORRORS of what has happened the last few years,along with the fact that if you REALLY have an emergency and NEED that $$ in a bad way,you are screwed to the tune of approx 40% of YOUR MONEY.The entire idea of these is lusacris.The big boys get your money(to make them more $$),and you cannot touch till retirement;its basically a SAVINGS ACCOUNT that you CANNOT touch,and yeah,IF you put enough in it(and go without all the other things you night need...countless),AND you have an employer that MATCHES what you do(VERY UNUSUAL these days),and the market doesn't collapse a few times like it has,you MIGHT have a nest egg...and guess what?..Thats IF YOU MAKE IT THERE...A GREAT hobby/investment seems all more perfect for the comming years.Find something that you LOVE..collecting rare coins,stamps,gems,ect.,become an expert at it,and put you money into something you and your family can ENJOY and still make $$ for retirement/rainy day.I've done both;the IRA and the collectable,and I can tell you FROM EXPIERIENCE,IF you do your homework,and approach your "investment" with PASSION and KNOWLEDGE,you'll make LOTS of $$ and have something more than "paper documents" to stare at.No,its not for everybody,I agree;some people NEED the safety and boredom of an IRA/401K type of retirement,and I believe everyone SHOULD have some kind of this at least to a "SMALL DEGREE" as a BACK-UP plan,and when you do a "Collectable" type of investment,its ALL ON YOU;YOU MAKE ALL THE CALLS,which again,isn't for everyone.And remember this,a collectable investment put $$ BACK IN THE ECONOMY,not into WALL STREET....Good Luck

July 05 2011 at 3:41 AM Report abuse rate up rate down Reply
gingercas

I an attempt to stimulate inflation to pay for the Iraq war the FED has collapsed the American economy. Basically, ( because of this 1.5 trillion dollar war we are bankrupt ), this debt will have to be extracted from the American people at great cost and suffering. This is the price the American people will have to pay for letting Israel dictate our foreign policy in the Middle East. Remember this to Communist, Fascist, National Socialist (Nazi ), or Zionist the ends justify the means.

July 01 2011 at 4:15 PM Report abuse -1 rate up rate down Reply
1 reply to gingercas's comment
LEE Resolution

utter nonsense. how about some facts as opposed to far left stale rhetoric.

July 01 2011 at 5:33 PM Report abuse rate up rate down Reply
gingercas

401k is basically a mechanism where the corporations siphon off money from workers wages in order to support their companies stock. This is accomplished by help from Washington under the guise of tax free savings for retirement. It is all one huge ponzi scheme where the workers are going to be sadly disappointed when it comes time to get this money.

July 01 2011 at 4:12 PM Report abuse -1 rate up rate down Reply
bill griffis

i was one the unfortune one lost about $13,000 during the downturn. when i finally started to make money back i got laid off i was 60yrs old unempoyment did not cover the bills so i had redraw all my money. to make up for it lost of wages to g cover the monthly bills i now i'm not the only one who had to do this.

July 01 2011 at 12:49 PM Report abuse rate up rate down Reply
1 reply to bill griffis's comment
pj512

Bill, I am like you. I had $15,000 in my 401(K). I got laid off in December of 2009. After three months of trying to find another job, I put my house up for sale. No luck there. So I transferred my $15,000 over to an IRA where I could withdraw some without the big penalty. Well, I still don't have a job and the $15,000 is history. So, yes, I believe we are like a lot of people out there. Sad, but true.

July 01 2011 at 3:20 PM Report abuse rate up rate down Reply
hemipwr54

Bancor is coming and the Dollar will soon be a memory . Hillary will soon be in a position to finger a lot of cash , watch out that it doesn't wind up in Bill's pockets .

July 01 2011 at 11:56 AM Report abuse rate up rate down Reply
mlmackay

excellent article but another thing to consider with IRA's, 401 k's and all other tax deferred plans. With the expiration of QE2 ,who bought 70% of US Treasury bonds last year and investors reluctance to put money in a 2% Federal bond., by the stroke of the president's pen (Executive Order- Remember FDR and gold in 1934) all Federally tax deferred retirement programs could be required to invest a percentage of their assets in Federal bonds. Watch for a propaganda campaign from Washington to "protect investors" from those rascals on Wall Street to indicate the start of this move. The price we pay for receiving a break.

July 01 2011 at 10:50 AM Report abuse rate up rate down Reply