What Should You Do With an Old 401(k)?
Changing jobs is a way of life in the modern economy. However, changing jobs also means changing retirement plans. When that happens, what becomes of your old retirement plan?
The answer all too often is "nothing." When you move to a new employer, it’s tempting to leave the money in your old company’s 401(k) plan, and many people do just that. The rationale (when people actually think about it) is often that this is easy and your money is still working towards your retirement.
Roll It Over
A potentially smarter alternative would be rolling those retirement assets into the 401(k) plan at your new employer. It may not seem like much of a change, but there can be real benefits to consolidating your 401(k) accounts in this manner.
For example, rather than having to analyze a wide range of investment options across different plans, you can focus on one pool of options and create an easier-to-manage portfolio. Having a single 401(k) also makes it easier to rebalance your portfolio over time, and you may save on fees as well.
Explore New Opportunities
You could also roll that money into an Individual Retirement Account (IRA), which offers a variety of benefits over 401(k) plans, including:
- Access to significantly more investment options. Where 401(k) plans usually offer a limited selection of stock and bond mutual funds, IRAs can give you more leeway to choose where to put your assets. You can invest in a wider variety of funds, as well as individual stocks or bonds, exchange-traded funds, and even annuities.
- Better fee structures. The average 401(k) costs its owner $59 in administrative fees alone, according to the investment consulting firm NEPC1. Fees for maintaining an IRA can vary, but often are less than that. If you don’t know how much your plan charges, ask your employer for a benefits booklet or a prospectus.
- More flexibility to access the funds. Unlike a 401(k), you can use the assets in an IRA without penalty for things like health insurance premiums while unemployed, qualified higher education expenses, and first-time home purchases.
Rolling a 401(k) plan into an IRA can be done any time after you leave an employer – and in some cases, even while you’re still employed. Use that time to understand your options and find a plan that has the right combination of investment opportunities, fee options and distribution flexibility for your situation. Your financial advisor can help review your options and find just the right plan for you.
1 2017 NEPC Defined Contribution Plan and Fee Survey, www.nepc.com/press/nepc-corporate-defined-contribution-plans-report-flat-fees.