Losing a 401(k) is easier than it seems — all it takes is a change in jobs, an exit from the workforce or a halt in contributions to put a retirement account in the back of one’s mind.
Retirement tip of the week: In an effort to keep track of your savings and to make sure your investments are working for you until retirement, consider consolidating your accounts.
“The older we get, the more we forget and the more difficult it becomes to retrieve these funds and keep track of what you have,” said Linda Farinola, a certified financial planner and partner at Princeton Financial Group. “Keep it simple.”
There are many factors to consider before merging assets in a new retirement plan or rolling them into an individual retirement account (IRA). Workers should first see if they’re eligible for their new employer’s retirement plan and if that plan allows for incoming rollovers.
“The Summary Plan Document (SPD) will tell you everything you need to know about your employer’s plan,” said Amie Agamata, a certified financial planner and Financial Planning Association Retirement Income Planning Advisory counsil member. “If the plan does allow for rollovers, then it may be best to review and compare the old 401(k) investment options and plan expenses to the new plan.”
What you’re paying
Fees are one of the most important factors. Many 401(k) plans have administrative fees, or the investment options available may have fees tacked on. Advisers often suggest retirement savers look into what funds they have in their retirement plans, if they’re being charged excessive fees, as well as what additional charges they may be paying for (perhaps unknowingly). These fees should also be compared to any new plan’s potential fees.
What you’re invested in
Fund choices are also critical. “If the fees are low, we then consider fund selection,” said Chris Hardy, a certified financial planner and founder of Paramount Investment Advisors. “If the fund choices are good, or especially if the funds are closed to new investors outside the plan, it may make sense to keep the account there.” On the contrary, if another account may have more attractive investment options, investors may find extra incentive to move their money over. A rollover IRA with a large custodian will typically offer a “wide array of choices to align with your goals,” said Henry Hoang, a certified financial planner and founder of Bright Wealth Advisors.
There are times, however, when the original plan has better fund options, so it may make sense for some investors to keep their assets put.
Also, if workers have appreciated company stock in an old plan, they may want to keep the stock in that account until they’re ready and able to distribute it, Farinola said.
When you’re retiring
Timelines are also important. If a person is preparing to retire soon, he may want to combine everything in one account for simplicity, Hardy said.
“It is more practical to manage just one account,” Hoang said. Many investors will not actively monitor their accounts, regularly review them or effectively build a portfolio. When retirement assets are merged, however, they can also consolidate future savings from other retirement plans.
The age at which a person plans to retire will also play a role in this decision. For example, 401(k) plans have a penalty for distributions prior to age 59 ½ years old, unless employees are at their current employers with a plan and leave the job at or after age 55 . People who fit into this category would be able to withdraw from their 401(k) without a penalty.
“In many cases, an investor would want to keep the flexibility of having that age 55 rule in case they need access to the funds before age 59 ½,” said Adam Wojtkowski, a certified financial planner at Smith Salley & Associates.