Brighton Perspective

Where's your 401k?

2010-03-18T09:42:24-04:00

If you’re leaving your company because of a downsizing or a switch in jobs don’t forget about the assets in your 401(k) plan. All too often, departing employees leave behind their retirement plans without giving much thought to the consequences.

According to a recent survey by Charles Schwab, almost half of the money held in 401(k) plans by employees who left their jobs during the first quarter of 2008 had not been moved a year later. While there is no penalty for leaving your 401k with your prior employer, there are benefits to moving the account. In fact, you have three other principal options: take a cash distribution, move the funds to a new employer’s plan, or roll over the assets to an IRA.

The cash distribution option should be considered the last resort, hardship option only. Under this scenario, you elect to take a lump-sum distribution from a 401(k) plan when leaving. Unfortunately, that election could result in a hefty tax bill. The amount representing pre-tax contributions and earnings in the 401(k) is taxed at ordinary income rates reaching as high as 35% on the federal level. If you’re under age 59½, the IRS will generally tack on a 10% “early withdrawal” penalty. And you still have to worry about state and local taxes and state penalties.

Besides incurring tax liability now, this approach means forfeiting the future benefit of tax-deferred savings and leaving a gap in your retirement plan. After 60 days have passed, you’ll have lost the opportunity to transfer the funds to another tax-advantaged plan. The final kicker? The employer’s 401(k) administrator will automatically withhold 20% of the payout, regardless of your personal circumstances. Again, this is the last resort, hardship option only.

If and when you find another job, you often can move your 401(k) balance to another 401(k) or other tax-qualified retirement plan available through your new company. That way, your assets will continue to grow tax-deferred without interruption. This direct transfer is also exempt from the early withdrawal penalty, and there’s no tax withholding as long as you arrange a trustee-to-trustee transfer from one plan to another. Avoid taking the funds yourself, because if you do, 20% will be withheld, and you won’t be able to recover that money until you file your tax return for the year of the transfer.

Finally, you can role the 401k account into an Individual Retirement Account (IRA). This may be the most advantageous approach. An IRA generally offers greater investment flexibility, letting you invest in a wide variety of stocks, bonds, and mutual funds, compared with 401(k) choices that tend to be more limited. And the IRA may give you greater control over distributions during retirement.
Beginning in 2010, all employees now also have a fourth option—rolling over employer plan funds to a Roth IRA that provides tax-free distributions during retirement. (Previously, Roth conversions were allowed only in a year in which your adjusted gross income didn’t exceed $100,000.) But moving money to a Roth means paying income tax on the untaxed portion of your account, unless you have large tax deductions that you can claim to offset this extra income.

2010-03-10T14:24:03-05:00

According to a new Mercer consulting study, 69% of participants in public and private defined contribution plans are now back to their pre-crisis account balances. That suggests most held firm and didn't shift to cash. Discipline is important to long-term success both in terms of trusting your decision making and in terms of your continued commitment to funding your account.

Is it or isn't it?

2010-03-08T13:19:08-05:00

Visited Walmart this weekend and overheard several conversations among shoppers about bargains. Meanwhile, credit unions are offering 2.9% auto financing on used cars to get consumers on the lot. Businesses continue to say their markets are as bad as ever and they're just trying to tough it out.

Meanwhile, the VIX is near recent lows, equity fund manager cash balances near all-time lows, and NASDAQ and the Russell 2000 (small cap stocks) are leading equities YTD. Yet, bond managers are near all-time cash balance highs.

Are we waiting for another shoe to drop, like fixed income managers, as consumers continue to tighten their finances? or are we on the leading edge of a recovery, as equity investors apparently believe, led by something other than consumers?

VOLATILITY S&P 500 Index Chart - Yahoo! Finance

2010-03-05T17:43:53-05:00

VOLATILITY S&P 500 Index Chart - Yahoo! Finance.

The VIX has been declining steadily since October of 2008 and, after a brief uptick in late January, is back to about where it began the year. The question is - are investors getting complacent again. At the risk of sounding overly pessimistic, the U.S. economy is still roughly 12,000,000 jobs short of full capacity, earnings estimates are declining, government spending continues to increase and businesses and consumers continue to reign in debt. These issues don't provide any reason, to me, as to why investors would be so sanguine regarding future investment performance.

We continue to have concerns regarding equity market appreciation in 2010 and even into 2011. Income remains the more likely source of any positive absolute returns this year. Continued complacency among investors, demonstrated by the VIX, could make positive total returns even more difficult to achieve if that complacency is shaken for any reason. Better to be skeptical than surprised!

2010-03-04T09:46:44-05:00

Think income for 2010! We believe equity markets have stiff headwinds to battle and a 2010 equity index price return between -10% and +3% wouldn't be surprising. Income can come from several sources so consider your options carefully. As always, evaluate downside risk first (risk of losing money) and decide your loss tolerance before investing.

2010-03-02T11:52:03-05:00

According to Fidelity, 401k plan participant balances were up 28% in 2009. That's after a roughly 27% down year in 2008. If you didn't panic and go to cash during 4Q08 and your returns were in line with the average participant, you're still down about 8% relative to year-end 2007, but you survived the "financial meltdown".

2010-02-26T16:03:52-05:00

The S&P 500 has been range bound for almost six months, trading between 1,050 and 1,150 since early September. We have been and remain concerned about a correction. Now, earnings growth for 2010 is forecast at roughly 13.5% over 2009. If the S&P remains around 1,100 through year-end and earnings come in in-line, we may... have a non-correction correction. However, we remain defensive given very uncertain economic data.