What to Do If Your Employer-Sponsored 401K Plan Is Terminated?

What to do if your 401k plan is terminated? An employer-sponsored retirement plan, such as a 401k is a great tool to boost your retirement savings. Employees benefit by receiving discounted services while employers who offer these plans benefit from tax breaks.

You can save more with an employer-sponsored 401k plan because of the generous tax benefits it offers. However, it can be terminated by your employer in certain cases. For instance, if your company gets acquired by a competitor, or it is going out of business, or it can no longer afford the overhead costs and resources associated with running 401k plans for its employees, etc. So, in case your employer-sponsored retirement plan is terminated, here are some of your options:

1) Rollover 401k to Your New Employer-Sponsored Plan

If your employer-sponsored 401k is terminated because the company has ceased operations, you might look for a new job. In this case, find out if the new employer accepts rollover of 401(k) funds from your previous employer-sponsored 401k account. This is one of the simplest options as you can consolidate your accounts and need not worry about opening a new retirement savings account. However, make sure that you have a wide range of affordable investment options. If your investment options are restricted, and the management or administrative fees are high, this may not be a good option.

2) Rollover Your 401K Funds Into an IRA

You can also roll over your 401(k) funds into an IRA account. You can easily open an IRA account with a reliable online brokerage firm if you don’t have one. A self-directed IRA gives you the liberty to decide your investment options and save a considerable amount on investment advisory fees that come with a managed IRA. After you roll over 401(k) funds into an IRA, you can choose from a variety of investment options such as mutual funds, stocks, exchange-traded funds, bonds and more. This option gives you added freedom and flexibility, which can help you learn more about creating a more balanced investment portfolio.

3) Choose to Rollover into a Roth IRA

If you own a Roth IRA account, you can consider to rollover your 401(k) funds into that account. Do keep in mind that this is likely to cost you considerable tax charges and the amount invested can be reduced by the amount of taxes withheld and paid. However, the future growth of your invested funds can be tax-free.

4) Leave Your 401k as It Is

Based on the size of your 401(k) account and the terms of this plan, you may have the option to leave your 401(k) funds in your former employer’s plan. However, keep in mind that you cannot contribute to the account. Although, you can leave it as it is and let your investments grow over time.

5) Seek Professional Advice

If you are unsure about the other options, consider taking professional financial advice. Look for an experienced and reliable investment advisor. Such professionals have sound knowledge and expertise and can help you make a good and safe choice for your 401(k) funds depending on your case.

Avoid the temptation to withdraw your funds from your employer-sponsored 401(k) in case it is terminated. It will be a bad decision if you haven’t turned 591/2 because then you will have to pay a hefty income tax as well as a 10% penalty. It is as good as nullifying all your efforts up until now of saving for retirement. With a bit of research and professional consultation, you can handle the funds from your terminated employer-sponsored 401(k) correctly and reinvest them successfully.

Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, AZ. He has over three decades of experience working with investments and retirement planning, and over the last 10 years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as MoneyForLunch, Biggerpocket, SocialMediaToday, WealthManagement, SeekingAlpha, and NuWireInvestor. If you need help and guidance with traditional or alternative investments, email him at rick@sdretirementplans.com or visit www.sdretirementplans.com.

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