Another 'Enron' Or Stock Meltdown Could Happen, But Be Wary Of Self-Inflicted 401(k) Losses, Too
Leaving Savings In Former Employer's Plan Or Cashing Out Can Put Big Dent In Nest Egg, Says RolloverSystems CEO
CHARLOTTE, N.C. (March 19, 2003) -- Every American who has retirement savings invested through a company 401(k) plan worries that their nest egg could be devastated by an Enron-like corporate accounting scandal or another stock market slump.
But Americans lose billions each year in self-inflicted losses by making poor choices in managing their 401(k) assets, especially when they are changing jobs, said Reginald Bowser, president and chief executive of RolloverSystems Inc., a provider of quick, easy and smart rollover solutions that enable 401(k) plan participants to protect and grow their retirement savings.
"Studies have shown that job-changers lose an estimated $7.1 to $8.3 billion in taxes and early withdrawal penalties annually by opting to take their 401(k) savings in a lump-sum cash distribution upon leaving their job," Bowser said. "That's the equivalent of eight Enrons every year in terms of losses to employees' retirement accounts, and the figure doesn't even include the lost potential for capital appreciation, which is enormous."
One of the best options for job changers is to roll over 401(k) plan savings immediately into an Individual Retirement Account (IRA), where the money can continue to grow on a tax-deferred basis, Bowser said. But many workers can't resist the urge to take the cash and spend it for current needs. As many as 66 percent of Generation X job changers take cash when leaving their jobs, and 78
percent of workers aged 20-29 take cash, research indicates.
Contributing to the temptation to cash out and spend those hard-earned savings is the fact that completing a 401(k) rollover traditionally has been a difficult task that requires a lot of paperwork and typically takes up to six to eight weeks. Now, however, using RolloverSystems' technology platform available at www.rollovermarket.com, job changers can fill out a simple form, receive multiple competing offers from RolloverSystems' Network of financial institutions, choose an IRA offer that makes sense for them, and complete the rollover process in 20-25 minutes.
In addition to cashing out their 401(k) plans, many workers make the mistake of leaving their retirement savings in their former employer's 401(k) plan. Doing so may not be the best choice because roughly 40 percent of companies with 401(k) plans charge record-keeping fees and/or trustee fees to maintain custody of an employee's plan assets even after the employee has left.
"Rolling your 401(k) assets over to an IRA is almost always a better option than either cashing out or leaving your savings in a former employer's plan," Bowser said. "And even for job changers who are going straight to a new job, rolling over to an IRA may be a better alternative than transferring retirement savings to the new employer's 401(k) plan, depending on the investment choices available in the new plan, employer matching provisions and other factors."
RolloverSystems' new technology promises to ease the burden for employers
who face new obligations to provide rollover options to former employees as a result of the Economic Growth & Tax Relief Reconciliation Act of 2001. Under the law, employers will be required to automatically roll over involuntary distributions that exceed $1,000 and are less than $5,000, unless the plan participant affirmatively elects to receive their money in a lump-sum distribution. Under current law, employers can automatically distribute 401(k) plan money to former employees who left with a plan balance of less than $5,000.
