A portable retirement plan is a type of retirement savings account that lets you do easy rollover of funds to another saving account after terminating your job. Unlike traditional employer-sponsored retirement plans where a huge paperwork is required, PRP or portable retirement plans are quite easy with several companies offering online one click slution.
Portable plans allow you to move your funds to a new plan without much fees as well. The funds rollover while switch job can be done without penalties or taxes. This helps you maintain continuous retirement savings, even if you don’t stay with one employer for your entire career.
Examples of portable retirement plans include:
- 401(k) plans (if allowed by your employer).
- IRA (Individual Retirement Accounts).
- 403(b) portable plans. These are specifically introduced for non profit employees, including education sector (that includes teachers) and hospitals.
These plans give you flexibility and control over your retirement savings as you change jobs.
Why Portable Retirement Plan?
There are several reasons to choose a portable retirement plan.
- Flexibility: With a portable plan, you don’t have to wait for your new employer to offer a retirement plan before moving your money. You can roll your old employer’s plan into an IRA or another portable account, ensuring your funds are always under your control.
- Avoiding Multiple Accounts: Rolling over funds to a portable account like an IRA means you can consolidate your retirement savings in one place, making it easier to track and manage them, rather than dealing with multiple employer-sponsored plans over time.
- Lower Fees and More Investment Options: Many employer-sponsored plans may have high fees or limited investment choices. Portable plans, like IRAs, often offer a wider variety of investment options and lower fees, allowing you to have more control over how your money grows.
- No Employer Dependence: A portable plan doesn’t depend on a job or an employer offering a specific retirement plan. This ensures you’re independent of the availability of a new employer’s plan when you change jobs.
In short, while rollovers work, a portable retirement plan offers more control, flexibility, and lower costs over your lifetime.
Concept of Portability of Retirement Accounts
Individual retirement accounts are more portable compared to employer sponsored plans. The most common employer sponsored plans are 401(k) and 403(b). But, how do they differentiate in terms of portability and rollover once you change the employer.
Portability of Employer Sponsored Plans, 401(k) or 403(b):
Employer sponsored plans like 401(k) and 403(b) allow transfer of funds to another account in one click online. Employees also have option to transfer to individual retirement accounts aka IRA.
The portability feature of these plans lets you keep your retirement savings intact without losing progress when switching employers. If your new employer offers a similar plan, you can transfer your old 401(k) or 403(b) balance into the new plan, and it will continue to grow with your contributions.
Portability of IRAs:
While IRAs aren’t tied to an employer, they are highly portable because they are individual accounts. If you leave a job, you can roll over your 401(k) or 403(b) into an IRA in one click. You’ll still have full control over the account and investment options, regardless of your employment status.
So, while employers mostly offer 401(k) or 403(b) plans, the portability aspect is wider than those plans. You can always roll over employer-sponsored plans into IRAs or a new employer’s plan. An IRA is often preferred when you’re changing jobs or looking for more control over investment options, while 401(k) and 403(b) options are useful if your new employer offers better terms.
How Does PRA Benefit Employers?
Portable retirement accounts is most suited for small businesses. This plan have tendency to save a ton of money on regulatory work. This ins one of the reason, it is preferred over traditional accounts. Employers can save money by offering portable retirement accounts.
Reduced Administrative Costs
Managing retirement plans can be expensive for employers, especially with employer-sponsored plans like 401(k) and 403(b), which require administrative resources, compliance with regulations, and ongoing management. By allowing employees to roll their retirement savings into a portable account like an IRA when they leave, employers can reduce their administrative burden and costs related to managing the retirement plan.
With a 401(k)/403(b), the employer handles the administrative tasks related to contributions, matching funds, record keeping, tax reporting, and compliance with regulations.
With a portable plan, the employer is no longer responsible for the ongoing management of the account after an employee rolls over their funds. Suppose the employee chooses to roll their 401(k) or 403(b) into an IRA (for example). The responsibility for managing the account, investment options, and compliance moves to the employee and their chosen financial institution.
Simplified Plan Administration
When employees leave, they can move their funds from the company’s plan into another account easily. This is the only major benefit portable accounts (IRA) have. This results in reducing the number of inactive accounts that the employer needs to manage. Fewer active accounts mean less paperwork, fewer reports to file, and reduced compliance checks, which all save money.
Portable accounts give employees the incentive to roll over their funds promptly, helping employers avoid having to deal with these situations.
