Amid a recessionary economic climate and layoffs in Big Tech, employees who find themselves kicked to the curb have some choices to make when it comes to their retirement benefits from tech titans such as Microsoft, Google, Twitter, Dell, Amazon and Meta.
Since the start of the year, Microsoft has unveiled plans to unload 10,000 workers and Google parent Alphabet will fire 12,000 employees. Other tech giants, including Twitter , Amazon, Meta Platforms (formerly Facebook), Dell and Intel also have disclosed job cuts.
Their workers, meanwhile, will need to grapple with a few questions when it comes to their 401(k) savings: Is it best to keep their retirement money in the company plan, roll over those dollars to a new employer plan or into an individual IRA?
Aaren Strand, Bellevue, Wash.-based lead adviser at Avier Wealth Advisors, an independent advisory firm with $650 million in assets under management that works with individuals in the tech industry, said a plus for many of these workers that will help keep them from having to withdraw their savings, and potentially face a tax penalty, is that the severance terms are decent.
“Hopefully that will allow retirement accounts to stay invested and positioned for the long term,” she said.
Ms. Strand added that so far, all the individuals she works with are still employed. “Most are nervous about the changing environment but we have spent time working on basic financial planning principles, things like adequate cash reserves and minimal debt,” she said. “In the event of a layoff, most will have adequate resources to ride out the storm.”
So, what happens to retirement assets once tech workers are terminated?
Microsoft’s company match is fully vested from day one, Ms. Strand said.
“The good news is that the dollars in your 401(k) are yours to keep,” she said. “Individuals can leave funds in their 401(k) or they can roll them into an IRA.”
But there are various factors to consider whether someone should leave funds in their former employer’s 401(k) or roll them to an IRA, Ms. Strand cautioned, as each situation is unique.
“I do not think that a general rule-of-thumb applies here,” she added.
In general, Jon Chambers, a Seattle-based managing director of Newport Beach, Calif.-based SageView Advisory Group, which advises on more than $150 billion in retirement assets, said by email that laid off workers at Microsoft have the option of leaving their plans at the company or rolling balances over to an IRA or to another employer’s retirement plan.
“Taxable distributions are also an option, but aren’t recommended because taking money out of a retirement plan triggers tax penalties and negatively impacts retirement planning,” he said.
Roger F. Vierra Jr., Rockland, Mass.-based senior institutional consultant of The Vierra Group, noted that typically when workers are laid off, the action is considered a “distributable event,” meaning the employee has the option to take a withdrawal, or roll his or her balance to another qualified retirement vehicle.
Vierra Group is an institutional consulting team with some $2.1 billion in assets under advisement within UBS Financial Services, itself a subsidiary of UBS AG.
“However, as long as the employee has a balance of $5,000 or more, they are permitted to keep their assets in the plan,” Mr. Vierra added. “In most cases the terminated employee will no longer be permitted to make contributions to their prior plan, but they still have control over how they invest within the plan’s investment menu.”
Whether a laid off worker should keep their retirement money in their former company plan or to roll over to a new one or an IRA is subjective and dependent on individual preferences, Mr. Chambers said.
“Retirement plan investments tend to be lower cost than IRAs, and are supervised by the company, typically with the assistance of a professional plan adviser,” he said. “Thus, at least in general terms, retirement plan investments are generally lower cost and better-performing relative to the average IRA investment. Conversely, most retirement plans offer a limited set of investment choices while IRAs offer a much broader set of investment choices. A well-informed worker that knows how to navigate IRA investment choices effectively may be able to construct a more customized retirement portfolio from an IRA than from his or her retirement plan. I don’t personally think there’s a ‘best’ or ‘worst’ choice, just different choices.”
By law, if the balance is more than $5,000, the assets can stay in the plan, Mr. Chambers said. Companies can’t mandate withdrawals from the retirement plan prior to normal retirement age without consent of the individual receiving the distribution.
But Mr. Chambers noted there’s an exception for small balance distributions — generally meaning amounts less than $5,000, increasing to $7,000 with the passage of SECURE 2.0 retirement legislation, but the higher limit isn’t yet applicable.
“Thus, people wanting to keep balances in their prior employer’s retirement plan generally have that option, except when balances are small or people are past normal retirement age,” he said.
Microsoft’s Savings Plus 401(k) Plan had about $48 billion in assets and almost 149,000 workers participating as of Dec. 31, 2021, according to its most recent Form 5500.
Microsoft’s 401(k) plan offers a $0.50 match for every pretax or Roth dollar saved, up to the IRS basic deferral limit. Employees’ contributions as well as the Microsoft match are 100% vested from the first day of employment, the company’s website indicated.
Microsoft and Google both declined to comment.
Tech giants regularly benchmark their benefit programs against other tech giants, Mr. Chambers said, so the Microsoft 401(k) plan is “reasonably representative” of the plan design offered by many large tech companies.
According to Form 5500 filed by Google, in 2021 the company matched the greater of either 100% of a participant’s contribution up to $3,000; or 50% of a participant’s contribution, up to a maximum $9,750 based on the $19,500 deferral limit in 2021.
“However, different financial objectives and employee demographics trigger different plan designs, so different tech companies may offer more generous or less generous retirement benefits than Microsoft,” Mr. Chambers said.
Indeed, Ms. Strand said that benefits vary at the large tech firms.
“Microsoft, Google, and Meta have a similar total dollar contribution match,” she said. “For example, Microsoft and Google match 50% of your contribution up to the annual limit, whereas Meta matches 100% of your contribution up to 50%. The total dollar amount is the same but the rate at which the match occurs throughout the year can be slightly different.”
Another similarity among all of the tech giants, Ms. Strand said, is that they almost all have an after-tax feature, known as the “mega backdoor Roth 401(k).”
“This allows individuals to contribute above the annual limit of $22,500 to another bucket within their 401(k) plan,” she explained. “This is an incredibly powerful tool, and we often encourage utilizing this benefit.”