In working with individual clients, I am always a little puzzled by how often I’ll find out they have one or more account balances with a former employer’s 401(k) or other retirement plan. I am also puzzled (though not so amazed anymore) that it has usually been a really long time since they’ve made changes or at least evaluated their investment selections in that plan.
Now don’t get me wrong, I think 401(k) plans are an awesome way to save for retirement and in my practice I advise both plan sponsors and plan participants on how to best utilize their plans and make them better. However, once you’re no longer employed where a particular plan is sponsored, there are good reasons, I believe, to go ahead and move those assets to your own IRA or in some cases to your new employer’s plan.
Here are 10 Reasons you might want to go ahead and “roll it over” ......
- Fees - It’s possible you’ll find lower cost investment options and account services outside of your former plan in your own IRA or in your new employer’s plan. Retirement plans, particularly older ones that have not been modified in some time, potentially carry higher fees than IRA options or a more updated retirement plan with more competitive cost structures.
- Emotional - If the memory of your former employer isn’t such a good one, why be reminded of it with the arrival of every quarterly statement? Get it out of there!
- Control - When you move your assets to your own IRA, you have more control over where and how you invest. If your assets are still with your former employer's plan, you go where they go...
- Better Investment Options - Perhaps your old employer’s plan had a good line-up of investment options that were monitored and well managed, but what if it didn’t? How do you know? This needs to be evaluated and you might find you’d be able to do better in your new employer’s plan or if you are able to select from the whole “universe” of investment options in your own IRA.
- Force-outs - You might get forced out anyway. Some qualified plans can force you out of the plan if your balance is $5,000 or less. Why wait till then and have to settle for the IRAthey choose or have to scramble around at the last minute to open your own without adequate care and due diligence being taken? Do it now, while you are in the driver’s seat.
- More post-death options - With an IRA, you’ll have more flexibility with respect to beneficiary designations and application of the minimum distribution rules. As an example, with an IRA, there is no need for spousal consent to select other that spouse as beneficiary (except in community property states)
- Consolidation - If you have balances with multiple former employers, why not consolidate to one account that will be easier to manage?
- Diversification - If your old plan did not have adequate diversification among its investment options, you’ll probably be able to achieve a more appropriate strategy in your own IRA or in your new plan if it has a quality investment option line-up.
- Future Contributions – You cannot continue contributions to an employer’s plan if you no longer work there. If your new employer doesn’t offer a plan, it’s a good idea to move your old balance to your own IRA and then continue your contributions... up to $5,000 per year (plus an additional $1,000 if 50 or older)
- Access to advice or help - If you decide that you need some help, it may be easier for an advisor to help you if you open an account with that advisor, roll it over, and let him or her work with you on the account going forward.
Bonus Reason – if you have a balance that is classified as a Roth 401(k) account, you’ll be required to take Minimum Required Distributions after you turn age 701/2. A Roth IRA does not have this requirement, so if you don’t think you’ll need the money, go ahead and roll it over and you can delay taking the money and if you die, it will still pass to your heirs income tax free.
One or more of these reasons might be a good reason for you to transfer out of a former employer’s plan. As with any financial decision, gather all the facts, determine what you want to accomplish, and then make an informed decision. There is a lot of good information out there to help you or if you think you need some help, interview a few advisors and choose one who puts your needs first.