Tag: 401(k)

The Great Resignation is happening. Here’s what to do with your 401k if you’ve left your job.

Posted on November 4, 2021 by - Retirement Planning

We’re over a year and half into Covid and people are still resigning in droves. In fact, a record 3% of the American workforce left their jobs in August (that’s 4.3 million workers), leading economists to refer to this period as the Great Resignation. Some of these workers may have simply switched jobs, but not many, since non-farm employment only rose by 194,000 in September.

So what are people doing? We don’t know for certain. They might be working for themselves, working part time (4.5 million people reported being partially employed in September), or they might simply be taking a break since employee-reported burnout is also at an all-time high, with women suffering more than men.  

What we do know for certain is most of these people will lose access to their singular way of saving for retirement: their employer-sponsored 401k. Once you quit, you can no longer contribute to your plan. So if you’re one of the millions of people who has resigned or is thinking about resigning, what will you do with your 401k and how will you continue to invest for retirement? Good news! You’ve got options.

Scenario 1: You’ve switched companies and your new employer offers a 401k

If you’re in this boat, you can choose to rollover your current 401k balance to your new employer’s plan or you can choose to roll it into an IRA. If you’ve researched your new employer’s 401k plan and you like the investment options, you’re comfortable with the fees, and if it accepts rollovers, rolling your current balance into the new plan could be a good option. 

If you don’t like the investment options, if the plan doesn’t accept rollovers, or if the administrator charges high fees (or any combination of these reasons), then you can roll it into an IRA. If you choose to do nothing and keep your balance where it is, you won’t be able to continue contributing to that 401k, so you’ll need another way to save for retirement such as an IRA with Icon. 

Icon’s retirement savings account was created using the best parts of the 401k and IRA to create a new type of retirement plan called portable retirement. Like a 401k, investments are managed for you. Like an IRA, it’s portable, and you have access to it wherever you go. And if you should decide to take a job with a new employer, they may support your Icon account.

Scenario 2: You’re working part time, you’re taking a break, or you’re working for yourself

If you no longer have access to a workplace retirement plan, that’s ok! You don’t have to push off saving for your future. Even small levels of contributions, once invested, can make a huge difference in later years.

So, you can always choose to keep your 401k where it is and also open an IRA to continue building your retirement savings, but unless you have a large balance and a great plan, 401k fees could eat so far into your savings they all but disappear. The better option is to roll your 401k into an IRA like Icon’s retirement savings account. This way, you continue to contribute to your future, all of your money is in one place, and high fees don’t erase your hard-earned savings.

Like we said above, Icon’s retirement account is plan that offers the best functionality from 401k and IRA accounts. Plus, it’s portable, can be managed from your phone, and can be adjusted to fit all the career decisions you’re likely to make throughout your working life.

The Nuclear Option: Cashing Out

With any of these scenarios, there’s always the option to cash out your 401k. But here’s why that’s not such a good idea:

  1. You’re not only going to pay income taxes on the distributed amount with a traditional 401k, but you’re also going to pay a 10% penalty. 
  2. You won’t be saving for retirement unless you open a new retirement savings account. 

Right now, more than 50% of both men and women think they’ll have to work part time in retirement given their current savings rate (according to a survey by T. Rowe Price). And 21% of men and 31% of women think they’ll run out of money in their later years. That doesn’t have to be the case. 

On average “the market”, which is a commonly used term that refers to the world of traditional investments like mutual funds and ETFs, grows at a rate of 7% per year. That means if you invested $100 the first year, you would earn $7. But that’s not all. Without contributing another dollar to your account, your earnings would start earning money as a function of what’s called “compounding”. Take a look:

It’s all about compound interest. Use the slider to see how what you set aside today can grow over time.

$1 Yearly Max
$1

What you set aside today

$7

Adds up over time with compound interest*

The above example assumes there are no additional contributions to your account. To see the effect of compounding on various contribution levels, check out this calculator from the SEC.  

The Fiduciary Risks of Offering a 401k Plan

Posted on October 25, 2021 by - Retirement Benefits

Did you know that by offering a 401k to your employees, you become their fiduciary? According to the Employee Retirement Income Security Act (ERISA) of 1974, that means you must act in their best interests. This might sound easy enough but in the past year, over 90 companies have had to defend themselves in lawsuits brought about by their own employees for fiduciary mismanagement of the company’s 401k plan.  At the heart of these cases are claims of excessive fees that employees have to pay as part of their 401k plan. The result of these lawsuits is an estimated $1 billion in settlements. 

These companies probably didn’t set out to harm their employees. But unfortunately, the set of requirements for retirement accounts set forth by the Department of Labor are both vague and comprehensive – which is horrible for plan sponsors and managers, and perfect for plaintiff lawyers. 

It’s not just Fortune 500 corporations that are at risk for lawsuits, even plans with assets as low as $4.5 million have been successfully sued.

So how do you make sure you do right by your employees and protect yourself from excess litigation? The first step is to understand what your fiduciary responsibilities are. 

What are my fiduciary responsibilities?

According to the Department of Labor, anyone involved in the management of a 401k plan is legally required to:

  • Act solely in the interest of plan participants and their beneficiaries
  • Act prudently
  • Diversify plan investments
  • Follow the terms of plan documents
  • Avoid conflicts of interest

Investment-specific fiduciary responsibilities require plan managers to offer a set of ‘prudent investments’ to their participants— which are defined as, “funds that meet their objective for a reasonable fee”.  Plan managers must also provide access to a broad range of financial markets so that plan participants are able to properly diversify their accounts to avoid major losses.

New to the world of investments? Too bad. Under ERISA, retirement plan managers are held to the ‘Prudent Expert’ fiduciary standard.  This means they must act ‘with the care, diligence, prudence, and skill of someone familiar with such matters’ — specifically an investment professional.  Employers lacking expertise are not excused from this requirement, so the vast majority of employers are expected to either seek professional advice or risk litigation.

401k plan managers are also responsible for extensive record keeping.  Specifically, plan documents must provide enough information to be “verified, explained, or clarified, and checked for accuracy and completeness.”  Mandatory records include fee invoices, trust statements, services contracts, claim records, payrolls, plan documents and amendments, board resolutions, insurance contracts, among many others.  

How can I protect myself from Excessive Fee litigation?

If you’re looking to protect your plan from Excessive Fee litigation, you have a couple of options:

Fiduciary Liability Insurance

You can obtain Fiduciary Liability Insurance.  Without it, you’re vulnerable to the following claims:

  • Breaches of Fiduciary Duty – violations of fiduciary obligations, responsibilities or duties under ERISA.
  • Errors or omissions in the administration of a plan. Including:
    • Advising, counseling, or giving notice to employees, participants and beneficiaries
    • Providing interpretations
    • Handling Records
    • Activities affecting enrollment, termination or cancellation of employees, participants, and beneficiaries under the Plan

Fiduciary Liability Insurance can be extremely costly, depending on the structure of your retirement plan.  And as a result of the previously discussed lawsuits, premiums have spiked by an average of 30-40%.

Offer a retirement plan that doesn’t carry the fiduciary risk

Icon’s innovative platform enables employers to help their employees save for retirement without exposing the business or themselves to all of the above. By using a payroll IRA as the investment vehicle, instead of a defined contribution plan (like a 401k) our plan removes the fiduciary risk, ERISA requirements and federal filing requirements.  New to the world of investments? No problem. Icon is an SEC registered investment advisor, so the fiduciary burden is on us.

With Icon setting up your company’s retirement plan takes minutes, not months. It’s the easiest, most affordable way to offer a retirement plan.