When Changing Jobs, Should You Leave 401(k) Money Behind?

Did you know--the average American only spends 4.6 years with an employer before moving on?

Such frequent employment turnover means there's a lot of retirement decision-making to take on during a potential 40- or 50-year working life. It's also an opportunity to make a tremendous number of smart--or not so smart--money decisions.

Generally, one of the least smart decisions is cashing out your 401(k) balance instead of rolling it into a personal IRA or your next employer's 401(k) plan. Such cash-outs before age 59 ½ are subject to a 10 percent penalty and immediate income tax, to say nothing of lost momentum in saving for retirement as a whole.

A 2015 Boston College study reported that on average, about 1.5 percent of all 401(k) and personal IRA assets "leak out" each year for a number of reasons, including loans and partial or complete cash-outs. As a result, the average loss of assets at retirement for those who remove retirement assets is about 25 percent.

A 2014 Fidelity Investments study sounded a particularly urgent alarm about 401(k) cash-outs and workers under the age of 40. The mutual fund giant noted that 35 percent of all participants were simply cashing out their 401(k) assets when leaving a job. However, for workers aged 20-39--indeed, those with the longest savings horizons--that number jumped to 41 percent. According to the Fidelity study, with the average cash out value at nearly $16,000, many 401(k) investors are forfeiting years of potential investment growth and retirement cash flow.

So what should you do? A great deal depends on your age, time to retirement and specific needs.

Start by taking an inventory of your retirement assets. Either alone or with the help of a qualified financial or tax expert, put together an official list of current and former 401(k) plans, personal IRAs or, depending on your years of work history, assets from traditional defined benefit retirement plans that were popular more than 20 years ago.

Make sure you always review retirement options whenever you change a job. If an employer is highly motivated to get you on board, query the company about the retirement savings options that would fit the position you're interviewing for. Ask hiring managers in general terms about how well their retirement options have performed and if you would have the option of rolling over your 401(k) assets to that employer. If, for example, your prospective employer has a more generous matching feature than your current employer has, that could create a favorable environment for transferring those assets. If not, you may want to keep your money in your employer's existing plan or consider a rollover to a personal IRA with the features you're looking for. Ask plenty of questions.

Evaluate IRA choices carefully. If you are considering moving or consolidating employer-based 401(k) assets into a personal IRA, evaluate your tax situation and both Traditional and Roth IRA options and their performance and fee levels before you arrange for a transfer.

Always go for the best-performing investment options that fit your needs and anticipated retirement date. Employer-based 401(k) plans generally disclose investment choices and investment fees. It may be a good idea to get qualified help to review those documents. Age is important. There's typically a 10 percent penalty if you withdraw money from a 401(k) or IRA before age 59 ½. But if you lose or leave your job at age 55 or later (or earlier for certain public employees), you can take 401(k) withdrawals without penalty. An IRA rollover requires the account holder to be at least 59 ½ years old before they can take a penalty-free IRA distribution. While keeping your money invested as long as possible is key to a successful retirement, withdrawal issues are also important to consider based on your age and time to retirement.

Understand your current employer's vesting policies. Your vesting date for your current employer's retirement plan is the date you get full access to all the funds you and your employer have contributed. Depending on the size of your current employer's contribution to your 401(k) plan, you might want to adjust your job search to make sure you vest--leaving early might cost you a lot of money.

Invest on your own. It's always important to do parallel personal retirement planning with any employer-based retirement options available to you. Get qualified help to evaluate the retirement savings and investment decisions you make on your own and at work.

Bottom line: With so many Americans unprepared for retirement and changing jobs so often, it makes good sense to study your employment-related retirement options very closely if you're planning to change jobs. Don't hesitate to get help if you need it.

Nathaniel Sillin directs Visa's financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.