The new era of rising layoffs means more workers will face what human resources people refer to as "a benefit event"--a rollover or cash distribution of a worker's 401(k) retirement savings assets because of a job change or retirement.
If you find yourself in that position you have a number of options for your retirement nest egg. What you shouldn't instantly do, experts say, is simply decide to take that money in cash and spend it.
FOR THE RECORD
Los Angeles Times Wednesday May 23, 2001 Home Edition Part A Part A Page 2 A2 Desk 2 inches; 68 words Type of Material: Correction
Retirement assets--A May 15 article in the Business section incorrectly implied that all retirement plan assets are protected from creditors. Under current federal bankruptcy law, only assets in plans governed by the Employee Retirement Income Security Act, such as 401(k) plans, defined benefit plans and some 403(b) plans, are shielded; assets in individual retirement accounts, 457 plans and some 403(b) plans, which are not governed by ERISA, may not be protected in some states.
Yet in recent years the cash-out option is exactly what most people have chosen, surveys show. While that may be unavoidable for some laid off workers with meager other savings, a cash-out often means that the "benefit event" benefits the tax collector more than you.
"It's so tempting to just spend that check, especially for someone in their 20s who may figure, 'It's only $3,000 anyway,' " said Ed Slott, a certified public accountant in Rockville Centre, N.Y., who publishes an IRA newsletter.
"But if you just roll it over [into another retirement account] and pretend you don't even have it, you will see it pay off exponentially over time," he said.
The 401(k) plan, named for a section of the U.S. Tax Code, has become a cornerstone of the nation's retirement system, with $1.8 trillion in assets. About 42 million people participate in the plans, with an average balance of about $42,000, according to consulting firm Cerulli Associates.
In a 401(k), and in similar plans for teachers and government employees, workers contribute a percentage of their pretax salaries to investment accounts that grow tax-deferred. Many employers match a portion of workers' contributions.
If you leave your employer, how you deal with that nest egg may be one of the most important financial decisions you'll ever make, experts say.
Here's a look at the options you have with 401(k) funds if you're laid off or leave your job voluntarily:
Question: If I just want the cash, I can have it, right?
Answer: Yes. In fact, about 68% of 401(k) participants opt for cash payment of retirement funds when changing jobs, according to the consulting and record-keeping firm Hewitt Associates, which studied 170,000 account payouts to workers ages 20 to 59 in 1999.
About 26% of workers rolled their balances into individual retirement accounts, Hewitt found. Only 6% moved their money to a new employer's 401(k) plan.
Younger investors and those with smaller accounts are the most likely to take cash: 78% of twentysomethings, for instance, took the money out, Hewitt found.
