It is not uncommon to have multiple 401(k) accounts after switching jobs several times over a career. According to a Fidelity survey, almost a third of people who transitioned jobs were not sure what to do with their old 401(k) or 403(b).1 Changing jobs is a busy time so thinking about what to do with your old 401(k) is often not a priority. If you are among the many busy people who have multiple retirement accounts at different firms, this post is for you.
Here are three reasons to consider doing some retirement account housekeeping.
Benefits of Consolidating Accounts
The successful growth of the 401(k) plan marked a change from employers taking care of employees via a pension plan to employees needing to do-it-yourself. Unfortunately, with lack of time and training, many Americans have neglected their retirement accounts. So what's the first step in taking control of your financial future? In most cases, investors are best served by consolidating old 401(k) accounts into a single IRA rollover account. Here's what you have to gain.
- Simplify. Consolidating multiple accounts into a single account makes for easier house keeping. You will only have one statement to review. Further, updating beneficiaries is something that people either forget to do or fail to update when circumstances change . You'll be more likely to update your beneficiaries on a single account. Another benefit is that the more money you have in one place, the more likely you'll pay attention to it.
- Establish a strategy. It is difficult to establish and maintain a strategy when your portfolio is segmented across numerous accounts. Combining 401(k) accounts into a single place will make it easier for you to initiate a plan and better implement a well constructed portfolio. Certainly, managing "one pot" makes important considerations like diversification and asset allocation easier to manage and monitor.
- Flexibility. Typically, 401(k) plans limit your investment options to choices available on a set investment menu. Rolling 401(k) funds into an IRA Rollover account will open up investment options where you may invest in individual stocks/bonds, mutual funds, exchange traded funds and more. Further, your IRA account can be managed professionally by an investment advisor where as a 401(k) is usually do-it-yourself.
Before You Decide
Of course, there are exceptions to the rule so here are a few examples where it might be best to leave your 401(k) alone.
- You plan to retire at an early age. If you retire from a company at age 55 or older, you can get penalty free access to your 401(k) account. However, once you roll your 401(k) into an IRA, IRA rules require you to wait until age 59 ½ to gain access to your funds without penalty, so your employer plan allows withdrawal 4 ½ years earlier than an IRA.
- You're planning to take a loan against retirement assets. You cannot borrow from an IRA but many 401(k) plans have loan provisions that allow you to borrow against your funds while you are actively employed with your company.
- You have company stock in your 401(k) that has appreciated significantly. Before rolling over your 401(k), you should consult your tax advisor. Under “net unrealized appreciation” rules, you may be able to take a lump-sum distribution of your 401(k) account, moving the employer stock into a taxable account which may have preferential tax treatment.
- Protection from creditors. Federal law protects the money in 401(k) plans but IRAs are protected by state law. Check with an attorney about your state's regulation because money in an IRA may not receive the same protection from creditors and lawsuits that 401(k) plans receive. This could be an issue if you work in a profession that has high risk of lawsuits.
We recently helped a new client sort through the administrative maze required to consolidate old 401(k) accounts into a single IRA rollover. It is not a difficult process but if you are not an investment advisor who is armed with the right questions and knows which forms are needed, it can be a bit daunting and frustrating. Moving accounts requires calling 401(k) providers -- navigating complex phone trees, waiting on hold, and talking to customer service reps who give you different answers to the same question each time you call their 800 number. In my opinion, the short-term pain is worth the potential long-term gains.
If you think that consolidating accounts would make your life easier but are not sure how to proceed, contact us. We have helped many of our clients consolidate accounts, review objectives, and actively manage their investments. We are happy to review your accounts and provide guidance.
Do you have multiple 401(k) plans at different providers? Do you plan to move any accounts within the next 12 months? Why?
1. The study was compiled from an online survey of 1,093 Fidelity participants who currently have an employer-sponsored retirement plan with a former employer, have stayed in their workplace plan for at least 120 days since leaving their employer, have at least $50,000 in plan assets, and are the financial decision makers for their retirement plans. The survey was hosted and administered by TNS between October 21 and November 22, 2010.