What To Do If Your 401(k) Plans Change

Many changes will likely occur from when you first open your retirement account to when you retire. You may grow in your profession, switch jobs or move careers, with your income increasing along the way. As time passes, your priorities will also likely change with changes in your situation. You may get married, have children, or get divorced, which may necessitate altering your goals. Moreover, you may have to modify your retirement plan due to a change in your plan administrator, your company being acquired by another firm, the availability of different investment options in different jobs, and more.

It is important to ensure you save enough for retirement to spend your golden years comfortably without worrying about money. This may become challenging if you have to manage any 401(k) plan changes. Consider consulting with a professional financial advisor who can help you understand and navigate any changes in your 401(k) plan to ensure you have enough saved to last the remaining years of your life.

This article discusses what happens if any changes occur in your retirement plan and how you can continue maximizing your rewards despite these changes.

What is a 401(k) plan?

A 401(k) is a company-sponsored retirement account that offers certain tax advantages, such as tax-deferred growth, a host of investment options, employer match, and more. An employer offers this retirement plan to their employee. There are primarily two kinds of 401(k)s - traditional and Roth. In a traditional 401(k), employees contribute from their pre-tax income, reducing their taxable income but must pay tax on any withdrawals made in retirement. On the other hand, in a Roth 401(k), contributions are made from after-tax income. However, you can make tax-free withdrawals in retirement.

What are some of the reasons your 401(k) plans may change?

1. A job switch

As per a recent report, an Average American can switch jobs 12 times throughout their career and tend to stay with the same employer for an average of 4.1 years. In addition, at any given time, 65% of people may be actively searching for a new job. Changing jobs has several advantages, such as higher salaries, more opportunities to learn and grow in their career, better positions, etc. There are also certain drawbacks, especially if you have a 401(k) retirement plan.

As stated above, your employer offers you a 401(k) plan. So, if you change your job, your employer will no longer offer you a 401(k), and if you were getting the employer match, it would stop. Moreover, you would be unable to contribute to your 401(k) plan. That said, you can still continue saving through your 401(k) by:

a. Rolling over your old 401(k) to a new 401(k): When changing your job, you can continue saving by rolling over your old 401(k) to a new 401(k). You can do a direct 401(k) rollover once a year, which will help eliminate any potential taxes and penalties associated with early withdrawals. Once you have transferred your money to your new 401(k) account, you can choose investments offered by your new employer and invest your money accordingly.

b. Withdrawing your money from your 401(k) account: If you choose to take out your money and transfer it into your new account, you need to keep certain things in mind:

• Deposit the transferred funds into the new account within a period of 60 days of withdrawal. If you fail to do so, the Internal Revenue Service (IRS) will treat the withdrawal as an early withdrawal (if you did it before reaching 59.5 years of age). You must pay a 10% penalty plus any income tax due on the withdrawn amount. In this scenario, your old employer would keep 20% of your money to prepay the tax due on your 401(k) savings.
• Suppose you have an ongoing loan through your 401(k), you must repay the loan when switching your job. If you fail to do so, the loan will be considered an early withdrawal, and you will have to pay taxes and a penalty on the same.

2. Business mergers and acquisitions

Not every company offers the same employee retirement plans. So, if your company undergoes a business merger, your new employer may offer a new 401(k).

This can happen in three ways:

a. Your old 401(k) may be merged with your new 401(k) offered by your new employer. If this occurs, the new plan’s rules, employer matching, investment options, etc., will apply to your 401(k). In addition, you may be locked out of your plan until all the formalities for the merger are completed.

b. Your old 401(k) plan may continue without any changes, and you continue to invest as before. The new employer may or may not offer a new 401(k), and it would be up to you to decide if you wish to switch to a new plan or continue investing in your old one.

c. You can also go for a full dissolution of your 401(k) plan. In this situation, you would not be able to further invest in your current plan, and the previously invested capital can be withdrawn after you reach 59.5 years of age. You may also be asked to switch to an Individual Retirement Account (IRA) as you cannot contribute to your old 401(k) account.

3. Changes made to your 401(k) account by your company

The employer can make changes to your 401(k) plan occasionally. Usually, this change pertains to changing the plan administrators. In this case, the employee is informed of the change within a period of 210 days of the end of the year. You will receive a document - Summary of Material Modifications (SMM) containing detailed information about the changes made to your plan.

Pay attention to the following:

a. Check whether your account balance is the same or not. Compare the last statement from the old administrator and the first statement from the new administrator. Contact your company’s human resources or payments department if you find any discrepancies.

b. Check the names of the beneficiaries of your 401(k) plan. In the event of your demise, your 401(k) money will be given to the beneficiary of your 401(k) plan rather than the nominee mentioned in your will. Hence, ensure that everything is up to date and as per your wishes, especially after changes have been made to the plan’s administrator. Contact your company’s HR department if you encounter any irregularities or misinformation. 

c. Check your 401(k) plan’s asset allocation, as the new plan’s administrator may change the asset allocation during the transition period. Look at your investments to check for any changes to your asset allocation, and keep an eye on your contribution rate as well.

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Can you change your 401(k) retirement plan?

You can change your retirement plan if you leave or switch your job.

However, here are a few things to keep in mind:

a. Review the available investment options

Every retirement plan offers different investment options that you can choose from based on your needs and goals. Ensure that you look at your options carefully before making a transfer. Choose a retirement plan that offers different investment options, such as stocks, bonds, mutual funds, target-date funds, real estate investment trusts (REITs), exchange-traded funds (ETFs), etc. It is considered advantageous to have a wide range of investment options to choose from.

b. Review the associated charges and fees of the new 401(k) plan

There are several costs associated with 401(k)s, such as administration, transaction, and maintenance fees. These costs can vary for different companies. Ensure your new plan has a more competitive fee structure than your previous one. If your plan has higher costs, it may not be beneficial for you in the long run. This is critical when rolling over your old 401(k) to a new 401(k) and 401(k) to IRA rollovers.

c. Check if your new employer offers an employer match

Try and negotiate an employer match when switching your job. Remember that not all companies offer an employer match, but most firms may offer one to attract and retain good employees. It is easier to negotiate a match if you are in a senior position in a company however, you should still try and get a match irrespective of your age or experience level. 

d. Stay up to date about the contribution limits

The IRS revises the contribution limits each year. For 2023, you can contribute $22,500 in a 401(k) annually and an additional catch-up contribution of $7,500 if you are above 50. On the other hand, you can contribute $6,500 to an IRA or $7,500 if you're 50 or older. If you switch to an IRA from a 401(k), you will lose the employer matching contributions. Moreover, your total accumulated capital will be much lesser in an IRA since the investment options, more or less, remain the same.

e. Consider what will happen to your employee stock

Many companies offer their stock to employees as a part of the bonus, at the time of joining the company, or promotion through the 401(k) account. If you continue working with the same company, you may continue to receive tax breaks on the same. However, if you switch your plan administrator or roll over your old 401(k) account to a new one, you may lose the above-mentioned tax breaks and pay tax liabilities on your company stock.

f. Be aware of the vesting period

Employers may impose a vesting period if they offer a 401(k) match. The vesting period helps encourage employees to stick around for a longer duration of time. Employees can lose a portion or the entirety of their employer match if they switch from their 401(k) to another retirement account. However, this can be avoided if the employee is fully vested. That said, the vesting period differs from company to company. 

401(k) plan changes you should be aware of

There are certain 401(k) plan changes you should remember at the time of switching jobs. These are:

a. Suppose you have less than $5,000 in your 401(k) account and decide to join a new company. In this instance, your previous employer can transfer your money to an IRA chosen by the company.

b. If your 401(k) account balance is less than $1,000, your employer can simply write you a check for the same amount, which you would have to deposit into a new 401(k) or an IRA within a period of 60 days from the date the check was issued. If the transfer is not made within the stipulated period of time, it will result in a 10% penalty and additional income tax as per your total annual income if you are less than 59.5 years of age.

To summarize

You may not have control over 401(k) plan changes. However, you can take certain steps to ensure you stay on track to achieve your goals, such as staying up to date with the laws and provisions of 401(k) plans. Doing so can help you avoid any potential penalties or taxes. Diversify your investments and not rely on a single retirement account for all your needs. Spread your savings across different instruments to reduce overall risk and maximize potential returns. If you have doubts or need help keeping up with 401(k) plan changes, consider hiring a professional financial advisor to help you manage your finances and secure your future.

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