Charles Schwab Finds Many Workers Who Have Left Their Jobs Have Also Left Their 401(k) Savings Behind

New Data Suggests Workers May Not Be Fully Maximizing Retirement Savings Dollars

Thursday, May 21, 2009 6:00 am PDT

Dateline:

SAN FRANCISCO

Public Company Information:

NASDAQ:
SCHW

SAN FRANCISCO--(BUSINESS WIRE)--As unemployment continues to rise and many struggle to keep their retirement savings on track, Charles Schwab today released new data showing a significant number of 401(k) assets held by workers who leave their jobs have been left behind in former employers’ plans. According to the data taken from plans administered by Schwab, 43 percent of assets held by 401(k) participants who left their jobs in the first quarter of 2008 had not been moved a year later.*

Leaving savings in a previous employer’s 401(k) plan is an option unless the employer requires a distribution, but there are three other options when deciding what to do with 401(k) savings when leaving a job: roll the money into an IRA, move the money into a new employer’s plan, or take the money as a cash distribution.

“We urge people to educate themselves on their options when they leave a job, especially if they expect to be out of work without access to a savings plan at a new job,” said Rene Kim, Charles Schwab senior vice president.

According to the Schwab data, 57 percent of assets held by 401(k) participants who left their job in the first quarter of 2008 had been distributed from former employers’ plans by the end of the first quarter 2009. Of those distributed assets,

  • 75 percent of assets were rolled over into IRAs,
  • 14 percent of assets were taken in cash distributions,
  • 7 percent of assets were moved into new employer plans,
  • 4 percent of assets were taken in other forms of distributions.*

Rollover IRA

As with an employer-sponsored retirement savings plan, a rollover IRA allows individuals to keep retirement assets invested in a tax deferred account, but with two additional advantages. First, an IRA usually offers greater investment flexibility including mutual funds, stocks, and bonds, as opposed to a 401(k) that is usually limited to a smaller core line up of investment choices chosen by an employer. Second, an IRA can provide greater flexibility when people are ready to start receiving retirement income.

“In many cases, rolling an old 401(k) into an IRA can be a strategic move, because it is tax free, there is no penalty, and an IRA provides more investment choices,” noted Kim. “A rollover IRA can also keep retirement savings more top of mind. People who leave money in a previous employer’s 401(k) plan often forget the money is even there, which can result in asset allocations falling way off balance based on an individual’s savings objectives and risk tolerance.”

New Employer’s Plan

Some of the advantages of moving retirement savings into a new employer’s plan include the ability to avoid current income taxes and potential penalties by keeping retirement savings invested. It also enables savings to continue to grow on a tax-deferred basis and provides the simplicity of having 401(k) savings consolidated in one workplace plan.

“Workers should evaluate any additional features available in their new plan and also compare the investment choices available in the new plan versus their old plan,” explained Kim.

A plan with a new employer will generally have far less investment flexibility compared to an IRA, Kim noted, but could have greater access to institutionally priced investments that can be more commonly available to investors in larger workplace retirement plans.

Cash Distribution

There are significant downsides to taking a cash distribution from a 401(k) plan. Individuals who take money out of their employer-sponsored retirement plan before age 59½ will pay a 10 percent federal penalty, and even if the penalties do not apply, they will still face federal, state, and possibly even local income taxes. The government will also take 20 percent of the withdrawal right away as an advance on the tax bill. Additional disadvantages include losing the power of tax-deferred compounding savings available in a tax-deferred savings plan, and once money is cashed out of a 401(k) for 60 days, it can no longer be rolled into an IRA or new employer’s plan. Having immediate access to cash in the case of an emergency is really the only advantage to cashing out a 401(k) plan.

“Unless there is a dire and immediate financial need, cashing out a 401(k) is almost always a bad idea,” Kim cautioned. “Cashing out eliminates the power of compounding savings, and people generally find it very hard to get back on track once they begin tapping retirement savings for shorter term needs.”

Schwab Rollover IRA

The Schwab Rollover IRA offers a number of advantages to investors, including no account service fees1, low minimum balance requirements and automatic deposits. Schwab also makes available complimentary 401(k) Rollover Consultants who can work with an individual’s former plan administrator to request a funds transfer, open a new Rollover IRA over the telephone, complete all the required paperwork, and arrange an appointment with a Schwab Investment Professional to help select investments once the account is opened and funded. Schwab Rollover IRAs also provide access to a wide range of investment choices – stocks, bonds, mutual funds CDs and more. For additional information, Schwab encourages investors to call 1-866-855-9095 or visit www.schwab.com/rollover.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

About Charles Schwab

The Charles Schwab Corporation (Nasdaq:SCHW) is a leading provider of financial services, with more than 300 offices and 7.5 million client brokerage accounts, 1.5 million corporate retirement plan participants, 544,000 banking accounts, and $1.2 trillion in client assets. Through its operating subsidiaries, the company provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC, www.sipc.org), and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through its Advisor Services division. The Charles Schwab Bank (member FDIC) provides banking and mortgage services and products. More information is available at www.schwab.com. (0509-9156)

*Data based on 9,790 terminated participants in Schwab Retirement Plan Services 401(k) plans from 1/1/2008 to 3/31/2009.

1 Other fees apply. Please refer to the Charles Schwab Pricing Guide for Individual Investors (“the Guide” and any amendments to the Guide for comprehensive details on fees.

Contact:

Charles Schwab
Michael Cianfrocca, 415-667-0344
michael.cianfrocca@schwab.com
or
Intermarket Communications
Eric Hazard, 212-754-5610
ehazard@intermarket.com

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