401(k) Rollover Basics
Moving on? Determine your best option for your 401(k) account.
According to the Bureau of Labor Statistics (https://www.bls.gov/) the average American holds 12 to 15 jobs over their career. While some of those moves are up in the same company, if you’re like most Americans, that means at least a few new employers as opposed to a new job with the same company.
When a new job means a new employer, it can also mean another 401(k) retirement account (https://www.irs.gov/retirement-plans/401k-plans) and if you leave those 401(k) accounts behind each time it could be difficult to keep up with them.
There are basically FOUR 401(k) OPTIONS after leaving a job:
- Leave it behind in the company 401(k)
- Transfer it to your new employer’s plan
- Roll it over into an IRA (https://en.wikipedia.org/wiki/Individual_retirement_account )
- Spend it.
Let’s just take option 4 off the table: If you spend your 401(k) funds now, you pay taxes AND a 10% penalty, which could mean you only get about .60 of every dollar. NOT a great deal, so unless you have an extreme emergency like a medical issue, or are in danger of losing your home, forget option 4.
Leave it Behind in the Company 401(k)
This is the obviously easiest option, and might be a good one, especially for those who are happy with the performance in their 401(k). At least until things settle down in the new job.
Generally speaking, mutual funds affiliated with 401(k) plans typically waive load fees for plan participants and transaction costs for 401(k) investors can be lower.
However, the perceived cost savings of a 401(k) plan can be flipped to the other end of the spectrum if the 401(k) plan offers mutual funds that charge high fees. It is vitally important to understand all the expenses of your 401(k) before deciding to keep the money parked there or not.
Transfer it to Your New Employer’s Plan Rolling over your money
Transferring your “old” 401(k) to your “new” 401(k) is also a fairly simple thing to do, and in at least some cases this could make the most sense. Even if your new 401(k) has a period before you become eligible to participate, employees are generally allowed to put their OWN funds into the 401(k) when they start a new job. They just won’t get matching dollars if those are offered.
This could be a good way to “seed” your new 401(k) and keep things streamlined, especially if you have a smaller account balance.
Roll it Over Into an IRA
There are pros and cons to leaving your money in an old 401(k) or transferring to a new 401(k). Mutual funds that charge high fees as mentioned before, but the biggest drawback is a limited number of investment options to choose from.
Most 401(k) retirement plans have a lineup of about 10-15 options, which in itself is not a bad thing, but someone with a larger account balance, maybe six figures, and a more sophisticated set of needs and experience, might find a short list too limiting.
An IRA (Individual Retirement Account) can open a person up to a much larger universe of investment options and strategies. In some case, the expenses for that access can be lower than the all-in expenses in a 401(k).
Additionally, individuals usually get a financial advisor along with an IRA rollover account. Research from Vanguard(*) has shown that financial advisors help most not just with investment choices and decisions, but with investor behaviors. Financial advisors provide accountability to stay on track, help add peace of mind, and have shown to actually increase returns over the life of their relationship.
And as alluded to before, leaving funds in old 401(k) accounts could accumulate multiple accounts that become difficult to track and manage.
Will Parrish is a founding partner of Slate, Disharoon, Parrish and Associates, LLC, located in Knoxville, Tennessee. Feel free to contact Will with questions via email firstname.lastname@example.org or directly by phone at (865) 357-7373. Visit their website, sdp-planning.com, or connect with Will on Linked In at linkedin.com/in/willparrish/.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisers, Inc., a Registered Investment Advisor. Slate, Disharoon, Parrish & Associates, LLC and Cambridge are not affiliated. Cambridge does not provide tax advice.
“Please be sure to speak to your advisor to carefully consider the differences between your company retirement account and investment in an IRA. These factors include, but are not limited to changes to availability of funds, withdrawals, fund expenses, and fees.”
*Source: Francis M. Kinniry Jr., Colleen M. Jaconetti, Michael A. DiJoseph,
and Yan Zilbering, 2014. Putting a value on your value: Quantifying Vanguard
Advisor’s Alpha. Valley Forge, Pa.: The Vanguard Group.