People rarely stay with the same employer for their entire career. In fact, according to the Bureau of labor statistics, people change jobs an average of 12 times during their lifetime. With all these job changes, most people will end up with a 401(k) or other retirement plans from an older employer. So, what are your options for that 401(k) that you left behind?

Leave It

The default option is to leave the 401(k) where it is. Some plans may kick you out at some point, so check with your plan administrator to determine if this is likely to happen to you. Often, it depends on the size of the account. After a grace period, certain employers will mail you a check if your 401(k) balance is below a certain level, for example, $5000. Be aware that failure to deposit this amount in another retirement account within 60 days will result in the full amount becoming taxable as income and possible penalties if you are under age 59 1/2.

You will need to log in periodically to monitor your performance, check your asset allocation, and rebalance if necessary. Certain employers make it easier than others to access your account information and if you have had multiple employers you will need to keep track of each of these accounts. It can be difficult to continue to deal with an employer that you no longer work for if you have any questions along the way.  You may not even know who to call if you have been gone a long time.  Lastly, if you do choose to leave your 401(k) where it is, do not forget about it! That might sound silly, but it happens. Put it on your calendar to log in and check on things quarterly or annually. As they say, out of sight out of mind; don’t let that happen.

Roll It into Your New 401(k)

If your new employer also offers a 401(k) plan, you may be able to roll your old account into your new one. Check with your new plan administrator to verify that they accept rollovers. There are some advantages to this option. First, you will only have one account and still get to benefit from the advantages of ERISA plans, including unlimited protection in the event of bankruptcy and other legal liabilities. Although we all hope that we never have to file for bankruptcy or be involved in a lawsuit, it does happen, and having your retirement savings protected is a significant benefit of ERISA plans like 401(k)s. Make sure you analyze the investment options in your new 401(k) before rolling over your old one. Verify that their choices are at least as good as the options you have in your current 401(k). Not all plans are created equal and the quality and cost of the investment options can vary dramatically.

Roll the 401(k) into an IRA

The third option is to roll the 401(k) into a Rollover IRA. A major advantage of this is that you will have many, many more investment options. Most employer 401(k) plans have a limited selection of mutual funds available for investment options. When you roll a 401(k) into an IRA, you can invest in essentially any publicly traded securities including individual stocks, bonds, and ETFs. This gives you more choices and flexibility and you may be able to better control the carrying costs of mutual funds. Also, when you change jobs in the future, you can roll these retirement accounts into your IRA and have fewer accounts to manage.  The account is directly in your name which makes it easier to manage; you will not need to go through your employer if you need a distribution or wish to change your beneficiaries.

401(k) accounts are fully protected from creditors in bankruptcy proceedings. By contrast, traditional IRAs have bankruptcy protection up to a maximum of $1,362,800 (in 2020). However, unlimited bankruptcy protection can be maintained on 401(k)s rolled into IRAs if you adhere to two rules: 1) designate the IRA as a “Rollover IRA” when you establish the account and 2) do not make annual IRA contributions to that account. If you follow those two rules, the bankruptcy protection on your 401(k) will “transfer” to your Rollover IRA. Rolling over an additional 401(k) accounts into the rollover IRA in the future is acceptable and will not void the bankruptcy protection.  Remember: if you also wish to fund a traditional IRA, keep these accounts separate from your rollover assets.

If you choose to roll an old 401(k) into an IRA, we strongly recommend a direct rollover. This means the funds will be directly transferred from your old 401(k) to your new rollover IRA in a custodian to custodian transfer. You will want to have the rollover IRA already established before you initiate the 401(k) transfer because they will need the custodian information and the account number.  Do not request a check! If the money from your 401(k) is sent directly to you, the IRS requires that 20% be withheld in taxes, even if your intent is to deposit the amount into your IRA.

When you roll your 401(k) into an IRA, you also have the choice of whether you want an investment advisor to help you with the account. You may choose to manage the investments yourself, but you will be on your own for the decision making and investment selection. If you do choose to hire a financial advisor to help you, you will pay them in one way or another for their services. We recommend looking for someone who is fee-only and a fiduciary. This means that you will pay them for their expertise, and they will not earn commissions based on trading or the investments they recommend. Furthermore, as fiduciaries, they must act in your best interests.  Some financial advisors may also be able to provide services other than portfolio management like financial planning or tax prep which changes the value proposition. Fees vary widely between advisors, so be sure to understand how much it will cost you to use their services and what you get for their fee.

As financial planners, we see many people who have multiple legacy retirement plan accounts left behind at former employers.  We are happy to help you evaluate and consolidate your accounts. Don’t hesitate to contact us if you have questions about retirement plans!