Charles Schwab Finds More Workers Conducting 401(k) Rollovers into IRAs

Tax Season Provides Impetus to Review Retirement Savings Strategy

Wednesday, March 17, 2010 7:00 am PDT

Dateline:

SAN FRANCISCO

Public Company Information:

NYSE:
SCHW
"Highest in Investor Satisfaction with Self-Directed Services"

SAN FRANCISCO--(BUSINESS WIRE)--As the April 15 tax deadline looms and people are thinking about how investing in an IRA might play a role in their retirement savings strategy, new data* from Charles Schwab shows that more people are rolling 401(k) savings into an IRA when leaving a job. According to Schwab data, 69 percent of assets held by 401(k) participants who left their job in the fourth quarter of 2008 had been distributed from former employers’ plans one year later by the end of 2009. An overwhelming majority of those assets was rolled over into IRAs.

Of the distributed assets in the Schwab data:

  • 80 percent were rolled over into IRAs
  • 10 percent were taken in cash distributions
  • 8 percent were moved into new employer plans
  • 2 percent were taken in other forms of distributions

A prior analysis conducted by Schwab from the beginning of 2008 to the beginning of 2009 found that 57 percent of 401(k) assets held by workers who left their job had been distributed one year later. Three-quarters (75%) of those distributed assets were rolled over into IRAs.**

“We are definitely seeing an uptick in the number of 401(k) plan participants who choose to roll over plan assets instead of cashing out or leaving savings with a previous employer,” said Catherine Golladay, vice president of 401(k) advice and education at Charles Schwab. “Consumers have been made more aware of the importance of saving for retirement, and when it comes time to change jobs, more people are thinking through their options for how to make the most of the money they have already saved.”

Workers generally have four choices with their 401(k) savings when they leave a job. They can leave money in a previous employer’s 401(k) plan unless the employer requires a distribution, roll the money into an IRA, move the money into a new employer’s plan if available, or take the money as a cash distribution.

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 potential advantages. First, an IRA usually offers greater investment flexibility including mutual funds, ETFs, stocks, and bonds, as opposed to a 401(k) that is typically 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.

“Rolling money into an IRA can also keep retirement savings more top of mind,” said Golladay, who added that money left behind with a previous employer is often forgotten, which can result in asset allocations falling way off balance based on an individual’s savings objectives and risk tolerance.

New Employer’s Plan

Similar to a Rollover IRA, 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 into one workplace plan.

“Rolling over retirement assets into the new employer’s 401(k) can be a good option for workers who seek the features and investment choices available in their new plan,” explained Golladay. She also noted that workplace retirement plans can have greater access to institutionally priced investments not always available to individual investors.

Cash Distribution

There can be 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.

Schwab Rollover IRA

The Schwab Rollover IRA offers a number of advantages to investors and 401(k) plan participants, including no account service fees, low minimum balance requirements and automatic deposits. Schwab also offers complimentary support from 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, help complete all the required paperwork, and arrange an appointment with a Schwab professional to help select investments once the account is opened and funded. For additional information, Schwab encourages investors to visit www.schwab.com/rollover or call 1-866-855-9095.

Additional information about investing in an IRA is available at the Schwab IRA Center at www.schwab.com/iracenter.

Schwab Real Life Retirement Services

Charles Schwab encourages individuals to take advantage of Schwab’s Real Life Retirement Services, which provides a realistic approach to retirement, not only offering key insight into actionable ways to save for and manage retirement savings, but also providing guidance on products and services and access to stories from Americans who have successfully moved into life’s third act. For more information please visit www.schwab.com/RealLifeRetirement.

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.

*Data based on 12,198 participants terminated in Q4 ’08 representing $427MM in assets
**Data based on 9,790 terminated participants from 1/1/2008 to 3/31/2009.

About Charles Schwab

The Charles Schwab Corporation (NYSE:SCHW) is a leading provider of financial services, with more than 300 offices and 7.8 million client brokerage accounts, 1.5 million corporate retirement plan participants, 753,000 banking accounts, and $1.4 trillion in client assets as of February 28, 2010. 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. Named "Highest in Investor Satisfaction with Self-Directed Services" by J.D. Power and Associates in 2009, 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. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides banking and mortgage services and products. More information is available at www.schwab.com. (0310-1890)

Contact:

Charles Schwab
Lindsay Tiles, 415-667-0479
lindsay.tiles@schwab.com
or
Intermarket Communications
Eric Hazard, 212-754-5610
ehazard@intermarket.com

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