The Bakersfield Californian
December 19, 2013
The good news is that American households have regained nearly all of the wealth lost during the Great Recession of 2008-2009. The Federal Reserve recently reported that total household net worth, which is assets minus liabilities, expanded for the eighth straight quarter.
The lion’s share of the credit goes to surging stock prices and recovering home values.
But even more encouraging, from a long-range standpoint, are the reports from economists that Americans are saving an increasing larger share of this wealth for their retirements.
The Employee Benefit Research Institute reported last month that fewer Americans are dipping into their 401(k) savings accounts to buy cars and “nice to have” items.
And, according to the institute, only 7.5 percent of U.S. workers last year cashed out their retirement money when they left their jobs for new ones. That’s half the percentage who did so a decade ago. And 20 years ago, 22.7 percent of workers cashed out and spent their retirement funds when they left a job.
The balances in 401(k) and similar plans are also reaching a record high. Fidelity Investments, the nation’s largest 401(k) provider, reported last month that the average account balance in the third quarter of 2013 was $84,300. That average was up more than 10 percent from the prior year.
Again, surging stock prices have increased the value of these accounts. But Fidelity reports an increase in plan participants and the amounts these workers are contributing to tax-deferred plans.
With the general economy improving and the return of employee mobility, workers often are uncertain how to deal with their retirement savings when they switch jobs. They basically have three choices, depending on how a company sets up its 401(k) plan:
- Keep the money in the former employer’s plan. (Often this is not allowed.)
- Roll over the money into the new employer’s plan. Done properly, this should not present tax liabilities. An employee should coordinate this rollover with both the former and new employer.
- Move the money into an independent tax-deferred plan, such as an IRA.
Even if it is allowed, I advise clients not to leave retirement funds in a former employer’s plan. Out of sight, out of mind. It is too easy to leave these funds “unattended” and too hard to ensure that maximum returns on investments are realized.
Perhaps the easiest option is simply rolling the money into the new employer’s plan. But this will limit investment options to those offered by the plan managers.
I advise that the best option is to roll the money into an investment vehicle, such as an IRA, which can be managed by the investor and his or her advisor. The investment options are not limited to the “one size fits all” options in a company’s plan. Rather investments are based on wise, personal financial decisions.
But this third option requires vigilance on the part of both the investor and advisor. The investor also must have a level of financial literacy. While advisors can advise, individuals must be involved in the management of their accounts.
Investor vigilance begins with the selection of a financial advisor. Do research. Check reviews and news coverage online. Ask for references and talk to existing clients. Meet with a potential advisor and determine general investment philosophies.
The financial advisor you select should be competent, trustworthy and ethical, as well as compatible with your plans and needs. Your financial future will depend on these qualities.