To Roll or Not to Roll; What to do With Your 401(k)
Every year, millions of Americans change jobs or retire and leave the workforce entirely. Most are faced with a seemingly inconsequential choice: what to do with your company 401k plan. Almost every financial advisor (including yours truly) will recommend rolling funds out of your company retirement plan and into a rollover IRA (that they can then charge fees and manage for you). Most often, there are good reasons for doing so, even if the costs might be a bit higher. But let’s explore some of the pros and cons.
Pros – Why you SHOULD roll over your IRA
You may have more investment options.
Most employer retirement plans have a limited menu of investments from which to choose, so rolling into an IRA can give you a lot more flexibility in how you manage your portfolio. Also, because most company retirement plans are geared towards younger workers (with more time to invest), the fixed income or bond investment options tend to be kind of an afterthought.
You might be able to find better investments.
Most large employer plans have pretty reasonable costs and a decent selection of funds. Smaller and medium size plans may not have access to these higher quality options and often carry high-cost funds and/or low-quality investments.
Multiple accounts.
If you have lots of small accounts with past employers (or several different accounts for the same employer), then consolidating these plans into one single account could make your life a lot easier. Remember, EACH 401k plan will eventually have its own required minimum distribution, so consolidating them will make those logistics easier.
Withdrawal flexibility.
Many employers place limits on when you can withdraw funds from their retirement plan. Also, you can’t do Roth conversions or qualified charitable distributions (QCDs) from company plans, so if these tactics are part of your plan, you’ll need to move those funds into an IRA to benefit from these tools.
Cons – Why you MIGHT want to keep your IRA in your company plan.
Asset protection is better in company retirement plans.
Company retirement plans have much better creditor protection, so if you’re worried about being sued, you might want to consider keeping your retirement savings in a company retirement plan.
Fees. While there are some expensive (often annuity based) company retirement plans, on average IRAs tend to cost more than 401ks. There are a number of reasons for this, including management fees and commissions (especially if you’re working with an insurance-based advisor). Large company 401(k) plans usually benefit from some purchasing power which often helps bring the cost down for participants.
Account balances and minimums. The average American 401k balance is well below the account minimums for most fiduciary advisors, meaning that you may be forced into higher fee or higher commission arrangements to manage your IRA. Even mutual fund companies have very high minimums for their lost cost investment options.
Early retirement options. Some company plans allow for penalty-free withdrawals after age 55. If your money is in an IRA, you must wait to age 59½ before you can take money out without penalties.
Remember, it’s not a clear-cut decision. There can be pros and cons in either direction, depending on your specific circumstances. And because of the inherent conflicts involved, financial advisors will almost always lean in one direction (rollover). The best fiduciary advisors will explain how they’re conflicted and then discuss what makes the most sense for you. In most cases, we find that rolling over out of a company retirement plan is the better choice. Your situation is going to be unique, so you should discuss it with your advisor when you’re ready to change jobs or thinking about retirement.
This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director/investment management with Blankinship & Foster, LLC, a wealth advisory firm specializing in financial planning and investment management for people preparing for retirement. Brooks can be reached at (858) 755-5166, or by email at rbrooks@bfadvisors.com. Brooks and his family live in Mission Hills.
Category: Business, Finances, Local News
