401k – Old vs. New – Where Should I Move It?
“Should I stay or should I go?” As a fiduciary, it’s important for our clients to be well-informed on their 401k options and understand the pros and cons of staying with or rolling over your retirement plan. Today, a vital fiduciary question we ask is: is it in the best interests of the client to do a 401k rollover when they leave a company? With the fiduciary standard it is important for investors to be educated to equip them in making the best decision.
In this blog we’ll cover 2 of the 4 options for investors and consider the consequences of those options. You want to make sure you understand all the penalties and benefits when making the decision. So, what do you do if you’re leaving your employer for whatever reason it may be?
Per the Financial Industry Regulatory Authority guidelines (FINRA) there are four options: 1) Keep your former employer’s 401k, 2) Liquidate your 401k and take the cash value of your account, 3) Rollover your old 401k to your new employer, if accepted, 4) Rollover your 401k to an individual retirement account (IRA). For the sake of keeping today’s article brief we’ll discuss options 1 and 3.
Keeping Your Former Employer’s 401k
There are pros and cons to keeping your former employer’s 401k. You may already be comfortable and familiar with your overall portfolio allocation and the fund manager’s strategy. If there’s a diverse and healthy fund selection to choose from and the investment platform is updated and reviewed for due diligence, that means the fiduciary is reviewing investments for the company well. You may have a healthy relationship with the advisers of the 401k, so an established relationship is a strength if they’re giving you prudent advice. There may be some negatives though to consider. In some cases, employers may charge higher fees if you’re not an active employee so check with your HR director on the rules keeping it there. If your investments stay with your former plan, you’ll have less organization in not having a fuller picture of your investment if your accounts and investments are spread out.
A Word on 401k Loans
Though we’d highly discourage taking loans from your 401k in general, you might not be able to have loan flexibility from the old 401k if it was a last resort. Looking at your plan summary document will help serve as a guide on this issue. Most 401ks rule that if you take a loan from your retirement account, you will not be able to move it until full loan repayment. If employment is terminated, you will need to repay the loan based on the time specified in the plan, usually 90 days or less. However, this loan will be seen as a taxable distribution if not repaid, so be prudent about your job security with your current employer. For the plans that are accessible, taxation and penalties on a temporary basis don’t apply as you are borrowing and not distributing.
Holding Former Company Stock
For those holding company stock, you will need to think about the long-term viability in that company. Questions to consider that aren’t necessarily negatives may be: what if your former employer merges with someone else, changes 401k platforms, or has the possibility of bankruptcy? Leaving behind a 401k account out of negligence or procrastination can be costly. So you have to weigh risk at every level and how much exposure you have to the company and the investments in it.
Internal Fees and Minimum Balances
We believe getting full transparency on cost is tantamount prior to moving it anywhere. Though there is a cost to everything make sure its financially worth it and wise in paying for what you get. The internal fees of the plan might be lower than the industry average, especially if it’s a reputable company like Vanguard, Fidelity, or Charles Schwab who are known for keeping cost low. Insurance companies have higher costs due to their insurance nature, yet many participants aren’t aware of this because fee disclosures are often overlooked. This can cost your portfolio’s ability to compound over the years eroding your growth potential. If you leave a company, they may require you to have a minimum balance or either take a lump sum rollover. Some don’t let you move it in one lump sum. In my personal experience as a participant in a 403b plan (401k like plan), the Principal Group plan didn’t allow lump sum distributions. Instead, a slow rollover of retirement assets over a few years had to be moved to another retirement vehicle. After figuring out the plan summary, you will know if you can or cannot move those tax-deferred assets to the new plan. This leads us to the discussion of option 3.
Rollover Your 401k to Your New Employer, If Accepted
There are some pros to rolling over the old 401k to the new. Portability to move all or some assets from your previous employer to your new 401k gives you the ability to track assets at one place instead of two or three. The new plan may have more investment options and flexibility, but it’s not guaranteed. That wild card with rolling over also depends on your new employer and the selection of investment choices they provide. As an example, the federal government Thrift Savings Plan (TSP) will give you a smaller list of index funds to choose from. Other companies and institutions may give you a few dozen funds as well as glide path or life cycle allocated funds. Another hurdle with the new employer might be ineligibility before one year. Meaning, they cannot accept the rollover yet. Other companies let you become eligible and rollover immediately into the plan. It’s important to note that you if you have a liking for a particular investment at your former employer, you will not have the ability to rollover that mutual fund or funds or annuities as a “distribution in kind” into the new retirement plan. You may want to consider keeping it at your former employer in that scenario if it’s possible.
In summary, there are many paths, positives, and pitfalls to consider having your retirement assets at either employer. No matter if they’re the new or old retirement plan sponsor. Make sure you are thorough in researching your 401k, and consider the scenarios and consequences that you may run into in the future. Our next blog on this topic will continue the train of thought on options 2 and 4: Fully liquidating or rolling over your retirement plan to an IRA. Continue to follow us on the www. wealthworthitblog.com, and feel free to comment or ask us questions here or at www.couragemiller.com. We hope this blog was well worth your time!