As an industry, we’ve been great about helping workers accumulate assets. But when it comes to their 401(k) distribution phase, or decumulation, confusion still reigns.
Indeed, nearly 70% of workers haven’t spoken with a financial advisor about making 401(k) account distributions. It’s a problem, according to Financial Engines, and exposes them to avoidable risks, fees, taxes, penalties and leakage.
More specifically, four in 10 individuals between ages 35 and 65 who left a job where they had money in a 401(k) plan were unaware that it might have been possible to keep their money in the plan.
In addition, more than one in four (28%) didn’t know that some retirement distribution choices trigger tax liabilities and penalties.
Additionally, half of the respondents were not aware that they might be able to move money from IRA accounts into their employer-sponsored 401k plan.
“There is a lot of confusion and a general lack of awareness among employees about their 401(k) distribution options when they retire or change jobs,” Ric Edelman, co-founder and Chairman of Edelman Financial Engines, said in a statement. “There can be huge consequences from making the wrong decision,” Edelman said, “ranging from taxes and penalties to higher fees and risky or poor performing investments.”
He added that the challenges are particularly acute since nearly half of survey respondents (47%) weren’t sure they knew the fees in their current retirement accounts.
Reasons for wrong choice
One reason many workers make the wrong choice is that they don’t seek the advice of a financial advisor.
Among all respondents, most (69%) have not consulted a financial advisor about their distribution options.
Among those who withdrew money from a 401(k) before their retirement, a quarter got no information or help from any resource.
Demonstrating the value of obtaining advice from a financial planner, nearly 80% of those who did consult a financial advisor said they felt more confident about their distribution strategy.
Financial Engines introduced a new “Fiduciary Distribution Review” to help.
“The service helps employees make informed decisions about their separation benefits, retirement plan distribution choices, and in-plan income options—free from bias or product conflicts of interest,” according to the company.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
