What Happens to your Money When you Leave a Job?

Leaving a job can be exciting. New role, new paycheck, new colleagues, and a new chapter. But your money? It doesn’t automatically pack up and follow you. Here’s what actually happens to your finances when you leave a job, especially that old 401(k), and steps to consider for future success.

First, let’s address your old 401(k) – You typically have (3) options, with considerations listed below:

Option 1: Leave the 401(k) where it is (a.k.a. “Do Nothing”):

• Pros: 

  • No immediate decisions or actions required

  • Easy (aka procrastinator-friendly)

  • Plans may offer low-fee, institutional share class investment options

• Cons:

  • Restricted to the plan’s investment menu, for better or worse

  • May be paying unnecessary fees (administrative, mutual fund fees, etc.)

  • Easy to forget about (lost accounts are more common than you’d think)

  • Can become administratively burdensome to have multiple 401K

Option 2: Rollover Over to Your New Employer’s 401(k) (If Allowed)

• Pros:

  • Consolidation of retirement assets for administrative simplicity

  • May allow continued access to institutional share class pricing

  • Maintains potential plan-specific benefits, such as creditor protections

• Cons:

  • Investment options remain limited to the new plan

  • Fees vary by plan and may not be the most efficient

  • Less flexibility in coordinating investments with outside accounts

Option 3: Rollover to an IRA:

• Pros:

  • Access to a broader range investment options including stocks, ETFs, CDs, individual bonds and a wider range of mutual funds

  • Fees can often be reduced, depending on investment and custodian selection

  • Ability to consolidate future retirement accounts if you change employers

• Cons:

  • Foregoing the “Rule of 55”, if applicable

  • Investment autonomy without the advice of a professional can seem daunting

  • Lack of access to a stable value fund

To Recap: The “right” choice depends on factors like cost, investment flexibility, and how hands-on you want to be with managing your money. For individuals who value customization and coordinated planning, an IRA rollover may be an attractive option, but employer plans can still make sense in the right circumstances.

Second, Let’s Address Vested vs. Unvested Funds: This part often trips people up.

• Your Contributions: Every dollar you contributed to your 401(k) is 100% vested — always.

• Employer Contributions: Employer matching or profit-sharing contributions may be subject to a vesting schedule, meaning they might not fully belong to you yet.

  • Common Vesting Schedules include: 

    • 1) Immediate vesting: You are 100% vested right away

    • 2) Graded Vesting: You gradually earn ownership over time (often up to 6 years)

    • 3) Cliff Vesting: You become fully vested after a set period (commonly up to 3 years)

  • Tip: You may not always be vested in employer contributions after you leave. The best way to determine what you are owed is to look on your statement for the “Vested Portion” OR inquire with the 401(k) custodian.

Third, What About Health Insurance When You Leave? Your health benefits don’t automatically follow you either.

• Your main options include:

  • New Employer’s Plan: Check eligibility dates to avoid a coverage gap.

  • COBRA: Allows you to keep your former employer’s plan temporarily, but it’s often significantly more expensive.

  • Marketplace Insurance: May offer alternatives, though costs and coverage vary.

Quick Checklist When You Leave a Job:

1. Confirm your 401(k) balance

   1. Understand what is vested and unvested

2. Decide where your retirement money will go

3. Update your contact information with the plan providers

4. Review health insurance options