Think Twice Before You Rollover Your 401k to a New Employer

Today, with the amount of layoffs and the number of workers being forced to change career paths, the need to protect their 401k, 403b, or other employer sponsored plan (ESP) is taking a sideline to the need of finding another income source.  Ironically, they could be bettering their retirement position by helping to secure an income stream for their future retirement needs.  Many employees do not know all of the options that they have with respect to their old ESP; down the road they will regret not investigating other viable options for their 401k.  They are just assuming that they have to roll over their prior ESP cash value to their new employer’s plan when they start a new job.

An ESP is a deferred compensation plan, usually funded monthly or bi-weekly, set up to help you prepare for your retirement needs.  These plans were designed to replace the traditional pension plan.   Most corporations can no longer afford to fund the income stream that pensions would traditionally provide during retirement, and the ESP takes the burden off of the employer.  These new vehicles, mainly consisting of a 401k or 403b, are managed by the employer while the employee bears all of the risk.  Most ESPs are dependent upon the performance of the stock market, and over the last 15 years the majority have either incurred a loss or broken even.  However, employees are still urged to stay the course with their ESP contributions and often assume that their contributions must continue on to another ESP when they part ways with their current employer.   Unfortunately, this is causing many employees to further delay their retirement goals, and many are missing opportunities to redirect their funds to gain an edge with an income stream for life.      

When the employee departs from an employer, they have the perfect opportunity to get a jump start on their retirement goals.  Many employees who are concerned about an income stream down the road (because they do not have a pension and are not counting on social security) are deciding to transfer their group sponsored plan to one that focuses on the individual goals, known as an Individual Retirement Account (IRA).   Basically what they do is convert the funds from a group annuity within the employer sponsored plan to an individual annuity.  Now that benefits are directed to the policy owner, as opposed to the employer, the funds become eligible for lifetime income offered through a fixed indexed annuity (FIA).  The FIA is the only safe money vehicle that can contractually guarantee you an income stream for life, regardless of future market performance, while still allowing you to maintain control of your cash value.   Not only can a FIA provide lifetime income for the annuity owner, the lifetime income can be set up to extend lifetime income to the spouse as well.   

How is lifetime income guaranteed?  Insurance companies who offer FIAs have attached income account values (IAV) known as an income rider.  An IAV is a non-cash value that grows at a fixed rate, regardless of market performance.  The goal of the IAV is to help determine the amount of income an annuity owner is eligible for at a later date.  For example, an annuity owner who is 55 years old may plan on retiring at the age of 70.  The IAV would be able to tell the annuity owner what their income is at the age of 70.  Once the IAV is established by the predetermined interest rate, the insurance company determines what percentage of the IAV would be paid out annually for life.  Typically, the older an annuity owner is the higher the payout they will receive.  Once again, it is the only way to predetermine an income stream for life, regardless of future market performance.

FIAs are state regulated products that have been deemed financially secure enough to offer lifetime guarantees.  Insurance companies that offer these fixed assets must have total assets exceed total liabilities.  They are able to do this by setting aside reserve pools of cash to protect the future interests of the annuity owner.  In fact, if an insurance company were to go insolvent (where total assets were unable to exceed total liabilities) , by law regulators step in and take over the operations of the insurance company in order to protect the interests of the annuity owner. 

When you don’t have a pension in place, what income can you count on?  I sincerely hope that you don’t plan on social security as being your primary income.  Workers departing from employment are starting  to redirect their ESP to lifetime income guarantees they don’t have.   ESP plans were initially designed to replace pension plans that employers can no longer afford.  Essentially the employer has shifted the responsibility of retirement planning onto the employee.  If you fail to embrace this responsibility you will likely result in either a delayed retirement or having to become a burden to your loved ones.   Without protecting your income needs in retirement, what is your plan of attack? 

The Epidemic of the Unemployed Younger Working Class

With a debt ridden Euro and the weekly jobless claims making the front page week in and week out, a long term epidemic is forming in our country.  It’s the epidemic of the unemployed younger working class that is a major threat to the financial longevity of our nation.  Our future leaders are bitter, and with rightful cause.   Without addressing the needs of our younger generation, the long term odds of surviving this financial crisis are greatly decreased. 

Our younger generation has to put their lives on hold as baby boomers are holding on to their jobs longer, due to insufficient assets for retirement.  Over the last decade alone, the average retirement age has been bumped back by at least 10 years because of the financial crisis; which has been at best a breakeven point for many portfolios.  As baby boomers are holding on to their jobs longer than ever before; many recent college graduates are being forced to take a job paying substantially less than their college degrees have historically paid, if they can find a job at all.  This is forcing the younger generation to stay at home longer, which in turn puts a burden on the retirement timeline for their parents.  Are you seeing the trend?  The main point here is that we now have an economy where there are no jobs being created and would-be jobs are not being relinquished by the baby boomers, causing a vicious cycle between the two groups.  

Employers are not hiring our most recent generation entering the workforce, and the backlash can be seen in the latest negative statistics.  According to a survey of the Pew Research Center, the US birth rate fell by more than 11% during the last four years for adults 18 to 34 years of age.  Since 2007, the marriage rate for the same demographic fell by 6.8%.  Once again, young Americans are putting their lives on hold because many baby boomers did not have a contingency plan in place for a down market.   The amount of 70 to 74 year olds working full time increased by almost 33% since May of 2008.  Those numbers are likely to climb even higher over the next several years given current market conditions and future uncertainty, especially considering the lingering concerns in Europe.  Without a contingency plan, we are looking at a whole new set of problems over the next decade.

These declines are directly linked to a lack of employment, resulting in many young Americans to feel detached from the American dream.  Prior to the financial crisis, the younger generation has always been optimistic about starting a career; today this is not the case.   The traditional optimistic drive is being replaced by a pessimistic view of the real world.   Unfortunately, this has resulted in some additional negative trends with our younger generation.  During the 2008 Presidential election, over 64% of registered voters between the ages of 18 to 24 went to the polls.  According to Harvard University’s Institute of Politics, only 47% of the same demographic is planning to vote in the upcoming election, a 17% decline.  They learned a real world lesson; just because something is promised in an election it doesn’t mean it will be delivered, and the numbers prove it.  Harvard economist Lawrence Katz states that almost one in five adult males from the age of 20 to 24 were either not working or not going to school because of the crisis.  As of May of this year, there was a 41% decrease of young Americans aged 20 to 24 working in comparison to four years ago.  Furthermore, Americans today under the age of 35 accounts for 65% of the Nation’s unemployed. 

The only way to get the younger generation into the workforce is to get the baby boomers into a position where they can retire and make their jobs available.  One legitimate approach is to focus on a guaranteed income stream for life.  Many investors are starting to realize that proper income planning can provide a safe haven against an uncertain and volatile market.  Having a guaranteed check in the latter years of retirement is a comfort in times of financial uncertainty.  Over the last few years, the fear of dying has been replaced for the first time ever by the fear of outliving your money.  Only when retirees feel that their lifetime income obligations are met will they openly embrace retirement.   The longer it takes for baby boomers to retire, the longer delay the younger generation will experience entering the workforce.  This needs to be corrected if we want to have any chance of ending this destructive cycle.