When leaving a job one of the decisions that you face is what to do with your 401(k). A recent study by the Government Accountability Office (the GAO) indicated that some financial services firms might be misleading workers into rolling their account balances into an individual retirement account versus other, potentially more beneficial alternatives. Let's take a look at the three main options (this does not include cashing out) available and discuss the pros and cons.
Leaving your balance with the old plan can be a good option for you if the plan offers a good variety of low-cost, solid-performing investment options. Often larger employers can use their collective buying power to drive administrative costs down and to offer very low cost, institutional-quality index and actively managed fund options. If this is the case with your former plan, perhaps it makes sense to leave your balance in place.
If your old plan doesn't offer a top-flight, low-cost investment menu perhaps you are better off rolling the balance to an IRA or to your new employer’s plan if one is offered. At any rate, you should pay attention to this money, unlike far too many people who leave an old 401(k) with an old employer and forget about it.
Deciding whether to roll your balance to your new employer’s plan is much the same as deciding whether to remain in your former employer’s plan. Evaluate plan options and costs, and if the new plan looks like a good one, it might make sense to move your balance. This will eliminate the need to keep track of the balance with your old employer and might offer some additional advantages in terms of having a higher balance in the plan under certain circumstances.
On the other hand, if your new employer offers a lousy 401(k) plan, why put any additional money there?
Rolling your old 401(k) to an IRA might be appropriate if neither your former employer’s nor your new employer’s 401(k) plans are top-notch. This might also be the right path for you if:
- You are comfortable managing and choosing your own investment options or you are working with a financial adviser who does this for you.
- You are looking for a place to consolidate your retirement investments other than a current or new employer’s retirement plan account.
Some things to consider when rolling over to an IRA:
- Look at the IRA custodian’s account fees, as well as any fees charged to buy or sell investments.
- Look at the availability of investment options that are appropriate for your situation. You are free to roll your account to an IRA at the custodian of your choice, and are under no obligation to roll your account to an IRA with the firm that provides your old company’s 401(k) no matter how much they may urge you to do so.
The GAO study highlighted the need to ensure that 401(k) participants receive full and unbiased information as to their options upon leaving a job. Plan participants also need to be proactive in evaluating the best option for their 401(k) balances when leaving as well. All too often I’ve seen folks with several unmanaged old 401(k) accounts that are neglected.
Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations, and endowments. Roger is active on both Twitter (@rwohlner) and LinkedIn. Check out Roger's popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments, and retirement plans.