Have You Checked on Your Old 401(k) Lately?
If your retirement accounts have been on autopilot, it’s time to take the wheel.
Remember way back in the Dark Ages, when it was common to graduate from school, go to work for a company and stay with them for decades? It was a world where you could pull into a gas station and an attendant would hurry over to pump your gas and offer to check under the hood. It was also a world where employers usually provided for their employees’ retirement.
Unfortunately, for most of us the days of employer-provided defined benefit pensions are long gone and have been replaced by employee-funded defined contribution plans. We are now responsible not only for pumping our own gas, but also for accumulating funds for retirement.
Another thing that has changed is the number of jobs you will have during your lifetime. Studies show that the average person will now change careers five to seven times during their working life and that 30% of the workforce will change jobs every 12 months.
With many employees taking advantage of the benefits of saving for retirement via their employer’s 401(k) programs, it’s likely that you will participate in several different employer-sponsored plans over your career. Statistics also show that somewhere between 50% to 60% of participants leave their 401(k) accounts with their prior employer’s plans.
When you leave an employer, there are essentially three options for what you can do with the vested balance of your 401(k) account. Performed properly, none of these options should create a taxable event. The first option is to leave your funds in the plan. The second is to perform a rollover from your old employer’s 401(k) to the 401(k) plan at your new employer. The third, and arguably better option, is to transfer the balance to an individual retirement account (IRA) rollover account.
The following are a few of the reasons why you should consider an IRA rollover.
- You can benefit from an advisor directly managing the funds. Often these old 401(k) accounts are left on autopilot and they are not being professionally managed. Even when the “Goal Manager” option was chosen to manage the account, these programs “manage” funds wearing blinders – they do not have any way of knowing what is in your other accounts. An advisor can leverage the benefit of using the IRA “container” to hold assets that are tax inefficient as part of your plan as well as other strategic moves. Vanguard, the well-known, low-cost provider of index funds, has an Advisor Alpha study that indicates investors can earn, on average, an additional 3% on their returns annually by having a professional advisor – and this is after paying the advisor’s fee.
- There are many more investment options available in an IRA. I’ve heard the 401(k) options described as the minibar in your hotel room. You can get a drink, but there will be limited options, and what you want may not be available at all. More options for investments with an IRA means more tools to work with in building your portfolio.
- Integration with your current provider. Suppose you have all your investments with a particular provider. You like the representative, you like the investment strategy, and you love their technology. Instead of your old 401(k) missing out on all of these positives, it can be integrated into your preferred provider’s platform via an IRA rollover.
- Convenience of access. Withdrawals can be made without penalty starting at age 59 ½, whether the funds are coming from a 401(k) or an IRA account, with required minimum distributions now starting at age 72. The difference is that making withdrawals from a 401(k) account can be much more cumbersome. IRA platforms are generally more convenient for distributions.
- Besides, who wants to deal with a prior employer anyway? If you get locked out of your online account or have questions about the investment options in your old 401(k), do you really want to have to work through the Human Resources representative at your prior employer?
Lastly, another important factor to consider is the cost of maintaining an account and cost of the underlying investments. In some cases, your old employer’s 401(k) plan may have negotiated low-cost institutional pricing and have reasonable fees for you to maintain the account; however, this is not always the case. Just as some 401(k) plans are better in terms of costs, some advisors may cost more than others.
The key here is having all the information necessary to make an informed decision. For this reason, if you are considering an IRA rollover, it is prudent to speak with a Registered Investment Advisor, who is required by law to behave as a fiduciary and be fully transparent in terms of pricing.
Contact me or another Kaufman Rossin Wealth professional if you have questions about your retirement plans or want to learn more about rolling over your old 401(k) into an IRA account to take advantage of the above benefits.