Should you stay or should you go?
When you retire, should you move your 401(k) out of the company when you walk out the door? There’s three good arguments to keeping your 401(k) assets with you when you leave, rather than leaving them with your former employer.
Leaving behind your assets comes with some risk, potentially higher fees than you could find on your own, and fewer investment options. Although you may like the comfort and familiarity of your workplace plan, it may be wiser to transfer your money to one or more individual retirement accounts than letting the dust settle on your 401(k).
“If you’ve left money behind, you’re losing control. The administrator at your old company may quit. You might forget to update the beneficiary. If you’ve left your money behind, you’re blindfolded and aren’t controlling your investments,” said Max Jaffe, a chartered retirement planning counselor at TBS Retirement Planning in Hurst, Texas. “If you’re not an employee anymore, that incentive to be in the 401(k) to qualify for matching is gone. Why stay?”
According to Vanguard, most retirement-age 401(k) plan participants leave their employer’s retirement plan within five years of leaving the job—with most people rolling over the funds to an IRA.
However, when plans permit flexible distributions, retirement-age participants, and their assets, are more likely to remain in the employer’s plan. The percentage of plans that offer this feature has nearly doubled in the past five years, along with an increasing demand for retiree-friendly plan designs, in-plan advice, and retirement income solutions, Vanguard said.
Such retiree-level advice is not necessarily available at all companies. So you need to examine your overall investments and the best place for them.
“Your 401(k) is not something you should see as an individual part of your plan. It needs to work in correlation with all other accounts. What are your other accounts doing, what are the tax qualifications of those accounts? Take inventory,” said Nick Foulks, adviser and director of communications strategy and client engagement at Great Waters Financial.
Here’s why you should move the funds quickly upon your retirement.
Limited choices at work
Your former employer’s 401(k) plan likely has a limited number of investment options and many of them are likely simple options to make it easier for employees to make safe decisions.
“Companies often limit the number of choices for investments to six to 12 choices. Compare that with an IRA, where the sky’s the limit,” Jaffe said.
“It largely depends on where you work. A larger company is going to afford you more options,” Foulks said. “Overall, though, the work plan may not have options to invest that are specific to your situation now as a retiree.”
“Move it out of your employer plan and implement time segmenting—move it into two or three IRA investments that allows you to have money for now, money for five to 10 years from now and 10 years plus,” Foulks said.
Examine the fees
Company-sponsored retirement accounts have layers of administrators, which causes more fees to be charged. Fees can severely diminish the value of your 401(k).
“Fees can eat into your retirement—they can eat up to a third of your retirement savings,” Jaffe said. “401(k)s have more layers of fees, and depending on the size of your employer and the plan they offer, that can be quite costly.”
“Ask what you’re paying for—look at the hidden fees in maintenance. Sure, you might get a statement that says your costs were $65 a year and that sounds great. But what are the operating costs? Make sure the fees and the expense ratios are appropriate to the expected return of the investment,” Foulks said.
“If you’re getting ready to sail into the sea of retirement, the anchor weighing you down and holding you back is fees,” Foulks said.
Jaffe said the lowest cost option is to move it to a bank IRA. Remember to have the funds moved from custodian to custodian—without ever going through your hands—otherwise you may face a penalty, depending on your age.
Out-of-sight, out-of-mind
If you leave money in an old employer’s 401(k), you’ll likely forget about it. It happens so often that under SECURE 2.0, new legislation passed related to retirement laws, a database will be developed for lost 401(k) plans.
Also, when you leave behind an account, you’re at risk of failing to update your beneficiary when life events such as a divorce or remarriage happens, Jaffe said.
“Check on all your orphan accounts from previous employers. You may have nominal amounts, but every dollar matters. And you want to make sure you’re not missing your RMDs (Required Minimum Distribution) on orphan accounts,” Foulks said.
If you’re in doubt, get some advice. There are plenty of online sites devoted to retirement education, as well as advisers available to help.
“If you have as little as $1,000, if you don’t know what you’re doing, get some advice,” Jaffe said. “Money is something very important. Make sure you check track of it and hold on to it.”
