I am the kind of person that likes to know where my money is and have as much control over it as I can. Maybe it stems from paying off my student loan and credit card debt years ago and turning a new page on finances, or maybe it is part paranoia, but I am someone that likes to be able to control my money.
I know that does not really make me unique as many of us are that way, but when the talk of a 401(k) rollover begins many people will confess that they do not know what exactly they have “out there,” as they put it, working for them for retirement.
I have encountered this regularly in the financial services industry and it comes down, many times, to a misconception about what a person can do with their 401(k) and the assumption that it’ll be just fine sitting with their former employer. However, a 401(k) rollover can be a great option for many; the key is that it just requires a little homework beforehand to determine if it is best for you.
Doing a 401(k) Rollover to Your New Employer Can Save Time
Now that you have left your job, one of your first calls should be to your former group benefits department to educate yourself about your options in regards to your 401(k).
For those that just want ease of use and little headaches it may make sense to do a 401(k) rollover to your new employer’s plan. There could potentially be many benefits to this, such as allowing you to have all of your 401(k) investments under one roof, so to speak, which could make it much easier to manage.
While I am all for saving time and making things easier while investing, the important thing to consider is that not all 401(k) plans allow for rollovers into their plans. If you are considering this route, make sure to contact your new 401(k) administrator to determine if they do allow an in-service 401(k) rollover and what requirements and waiting periods they might have in place. I know the temptation is there to put them all under one plan, but that may not always be an option for you.
We Have a Tendency to Forget Old 401(k)s
It seems as nearly every person I speak with about their 401(k) can think of at least one or two old 401(k)s they have floating out there somewhere. They’re not alone either, as according to Forbes, there were more than 15 million Americans who had left behind an old 401(k) with their employer (as of 2010).
That is not a small number by any means and sheds light on how many people may have little idea of what is going on with their investments. When changing jobs, I know there can be a lot of things that need to be taken care of, but why forget about your 401(k)? Here’s the way I view it: that is my money, set aside specifically for retirement, and I want to keep control over it.
The problem with not doing a 401(k) rollover in this case is varied. Some employers might move your current investments into something else, or they could start charging you fees to have the funds there and worse yet you may have little knowledge over how they’re being managed.
One thing to keep in mind is that many plans will not allow you to keep your investments with them if they are under a certain dollar amount. This will vary by plan, so make sure to check with the former administrator if this is an option you are considering.
There Are More Than Two Options
The main culprit I found with investors not wanting to do a 401(k) rollover was that they did not how to rollover a 401(k) and did not know the options they have.
The great thing, in many cases, is that the process of rolling over your 401(k) can be almost painless. There are no real uniform forms, so the paperwork will vary from administrator to administrator with the key being getting the funds to not be made payable to you, but always to the new administrator.
If you’ve decided or discovered that a 401(k) rollover to your new plan is not an option, you still have many options available.
The easiest may be opening a rollover IRA and moving the funds into that account. The nice thing about doing this is that it greatly increases your investment options, generally speaking. Instead of having a small number of mutual funds or ETFs to choose from you can now have access to whatever ones your brokerage offers as well as being able to invest in stocks and beyond. Additionally, you also open yourself up to potentially lower fee options that can greatly impact your portfolio over time.
Beyond that you could also pursue a Roth conversion if that is something that interests you, just make sure you know the tax ramifications of doing so prior to taking action. Ultimately, I find that by doing a 401(k) rollover I am taking an active role in my retirement planning and putting myself in a better position.
As Always it Depends on Your Situation
As with anything related to investing, the situation is not always plain and simple for everyone. There are many things to take into consideration when you’re looking at a potential 401(k) rollover and it should be handled seriously.
It might even mean you leave it with your former plan if they have a solid stable of offerings and charge low fees. While I would not personally choose to stay with an old 401(k) plan, it is a viable option for some.
The key is to look at how you’re planning for retirement as a whole and what role your old 401(k) plays in that. Once you determine that, the rest of it is pretty simple and can be handled, generally, by filling out a form or two.
In addition to that, I would also like to add that if at all possible, avoid cashing out of your 401(k) at all costs. I know it can be tempting for many, but the short-term tax implications and long-term impact on your retirement planning aren’t worth it.
What are your thoughts? Do you think a 401(k) rollover always makes sense? How many old 401(k)s do you have?
John Schmoll is the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. He’s passionate about helping people learn how to make wise investing decisions so they can prepare for their futures and avoid the mistakes that he and so many others have made.