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Since its inception in 1978, the 401(k) system has become somewhat outdated and is now facing significant hurdles. These plans are accessible to only about half of the workforce, and their rigidity doesn’t align well with today’s job mobility, according to Laurie Rowley, a co-founder and CEO at Icon, a firm specializing in retirement solutions.
Rowley recently discussed on Decoding Retirement how issues such as lack of portability are leading to numerous lost retirement accounts. “The 401(k) plan was never designed to be easily transportable,” Rowley explained, noting that while there are various systems to help with this, none are foolproof.
Rowley outlined four typical scenarios for what happens when employees leave their jobs with a 401(k). A large number opt to abandon their 401(k) plans. Astonishingly, 25% of these accounts fall into this category, affecting 29 million people. “It’s easy to forget about these accounts once you’ve left them,” she remarked.
Alternatively, many employees roll their 401(k) into an IRA, with approximately $800 billion moved in this manner. A smaller segment transfers their account to a new employer’s 401(k), although this can often be a challenging process, Rowley noted.
Some individuals decide to cash out, which poses another problem. “This complexity is where the portability issue arises,” Rowley said. “Expecting people to make such frequent and important decisions about their retirement investments whenever they switch jobs is a tall order. It involves the most critical asset in their lives, which we’re asking them to alter repeatedly as they transition.”
Rowley recommends rolling a 401(k) into an IRA as a way to manage this “portability” problem effectively. “Everyone should manage their own retirement plans,” she advised. “Transferring out of your employer’s 401(k) and into an IRA ensures you can stay in control.”
With an IRA, “you always know exactly where your money is,” she continued. “It allows you to keep an eye on both investments and fees, preventing the loss of a retirement plan. This asset should remain within your grasp throughout your lifetime.”
Rowley’s firm, Icon, also offers a different kind of solution: the Portable Retirement Plan (PRP). Working similarly to traditional plans, employees contribute through payroll deductions. “It combines the benefits of workplace and individual retirement plans,” Rowley explained. “Employer-facilitated saving has been shown to boost wealth accumulation.”
What sets the PRP apart is that it removes financial burdens and responsibility from employers, simplifying administration. “Our platform allows employers to set it up easily,” she said, adding that Icon takes on fiduciary duties.
By customizing portfolios to individuals’ needs and directing savings into personal accounts, Rowley believes employees can retain control over their retirement plans. “This setup lets you avoid changes when you change jobs,” she pointed out. “Your investment strategy stays intact – you simply disconnect from one employer and connect to another.”
Tune in every Tuesday on Decoding Retirement where retirement expert and financial educator, Robert Powell, provides valuable insights to help you plan for your future. Discover more episodes on your preferred streaming service or at our video hub.
