One of the first things that people think of when they leave their job is what to do with their 401(k) from that employer. While there is plenty of advice out there, much of it could be conflicted with pre-existing bias, depending on what benefit certain people or entities have in moving it or making it stay put. Hopefully, the options below will assist in your decision-making process as you decide what to do with your old 401(k).
Three Options for Your Old 401(K)
For those looking for a quick and dirty list of your potential options for the 401(k) from your previous employer, that’s below. We dive further into each possibility and its pros and cons in the rest of this piece.
Note: if you have a Roth of after-tax option, it does not impact the advice given here, though there are some nuances to Roth that should be explored as well.
Related Reading: What to Do With An Old 403(b)
1. Leave Your 401(k) With Your Previous Employer’s Plan
In most cases with 401(k) plans, as long as you have a balance that is large enough, you are not forced to do anything. Your investment options will likely remain the same, and you are simply put in a “separated service” section of participants. The pros of selecting this option? You will still have the ability to receive reports and reallocate the assets when you see fit. While you cannot contribute to it, you may hold it at the investment company. It’s not always the case, but typically, the larger the 401(k) plan, the lower the expenses. There can be some economies of scale that may allow you to reduce prices on some of your funds as well as administrative costs.
The downside to leaving it there is that any changes to the 401(k) product company or investment lineup will impact you. If you like a particular fund and the plan sponsor gets rid of it, you will not be able to keep it. You are also governed by the plan document of the plan, which is basically the instructions that the participants have to follow. There can be additional fees that are passed down to participants as well, including potential financial advisory fees.
2. Move Your Old 401(k) to Your New Employer’s Plan
If you are moving to a new job and you are offered another 401(k) plan, regardless of whether or not you are eligible to contribute funds out of your paycheck, you should be able to roll your existing 401(k) balance into the plan. This will be a tax-free event, and you will have to select new funds out of the lineup your plan sponsor offers. You likely will have to call your previous 401(k) company to initiate this rollover, and in many cases, there is paperwork involved. This allows you to consolidate your assets into one 401(k) plan for potentially better continuity in your investments.
The downside is that fees may not be lower than your previous plan and the investment lineup will also be different. You could have fewer choices than your last plan, as well, so you will want to do a full side-by-side comparison of each plan’s investment options, expenses, and documentation to assure that this is the best option for you.
3. Roll Your Old 401(k) into an IRA
The “I” in IRA stands for individual. If you prefer to have more control over your assets, this may be a viable option. This involves contacting your previous employer and instructing them where to send the assets. It will remain free of taxation if you move the assets to an IRA held at a financial institution for your benefit (also known as FBO). For example, the check could be made payable to Charles Schwab FBO Jane Smith. An IRA is just a checkbox from the IRS, in that there is a significant amount of choice available to you in investment options. You may buy stocks and bonds, ETFs, mutual funds, real estate, cryptocurrencies, savings accounts, and many other options.
The downside to rolling your old 401(k) into an IRA might come down to choice. There can be an overwhelmingly large amount of choices. Each choice carries its own risk and fees as well. Many financial advisors often recommend that clients roll their assets into IRAs.
But this isn’t free of conflict. In many cases, financial advisors cannot receive compensation in the 401(k) plan, but can if they roll it into an IRA. Before you choose to move your assets into an IRA, you should consider the management fees, expenses, and objectives of your investment versus other alternatives.
Considering the options above is essential to your future financial picture. Making the right choice can be very important, so take your time to understand how each option impacts you.
ABOUT THE AUTHOR
Clint Walkner is one of the co-founders and managing partners of Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.