According to the Bureau of Labor Statistics, people are changing jobs more frequently than ever before. Unlike prior generations, increased mobility, rapidly changing technology, and the desire for flexibility from both employers and employees have altered the way people view a successful career. In fact, the average person will now change jobs 10 to 15 times during their working life. This increase in job changes, combined with the fact that most employers now provide a 401(k) plan to employees, usually leads to an important financial decision—deciding what to do with an old 401(k).
The Three Main Available Options
There are three obvious options, and you should take the time to consider each.
- You can most likely keep your money in your old plan. This may be advantageous if you are very familiar with the plan’s administrative and investment options.
- You may be able to move your funds to your new plan. You can check with your new human resources person to find out.
- You can roll the funds over into a Rollover IRA.
It is a good idea to make a check list of the pros and cons of each. Do a quick analysis of the costs in each option. Are the sub account investments costlier in one than the other? The literature provided by the plan sponsor will detail the expense ratios of all of the sub accounts offered. There can be a very significant difference in costs that will add up over time.
Which has the more robust investment options? All 401(k) plans must offer enough alternatives so that a proper asset allocation can be achieved. But the total number of funds is chosen by the plan sponsor, and can vary widely among employers. Some 401(k) plans offer age designed funds that automatically adjust the risk of the investments as you grow older. Others offer self-directed brokerage accounts, where you or your advisor can choose your own investments not listed on the generic plate.
What loan provisions are available? Although borrowing from your 401(k) is not advisable in normal circumstances, it may be the best alternative in an emergency. Most 401(k) plans that allow loans are constructed with a five year pay back and a stated interest rate. But remember, when you are paying this interest back to yourself, not a bank. A loan also enables you to take money from your 401(k) without incurring the 10 percent penalty for withdrawals before the age of 59 1/2. You do not need to pay the penalty or taxes on the loan because you are going to pay it back into the 401(k).
Account Administration Features
Compare the account administration features of each. Which has the friendlier website? How easy is it to navigate through the investment choices and to make any necessary changes in your asset allocation? Also, see how many times a year changes can be made. What education materials are provided? Employers, in most cases, try to use very easy to understand information. What services are provided by phone or in person? Some plans provide help with selection of investments based on your desired asset allocation.
If you make a decision to move your funds, a direct rollover from your old 401(k) into the new 401(k) or IRA is usually the best idea. That way, the funds do not come to you and you do not need to worry about something going wrong with the transfer. The majority of plan custodians have processes in place to very efficiently exchange the money.
If you are using a financial advisor to help with your decision, be aware that the new Department of Labor fiduciary rules require the advisor to demonstrate why any change out of your old 401(k) and into a new investment is in your best interest. Ask for a written analysis.
Retirement Planning with Punta Gorda Financial Planning
At Punta Gorda Financial Planning, we take our fiduciary responsibility very seriously. We can discuss with you your specific goals for your retirement funds and provide concrete analysis of the pros and cons of the many choices you may confront. Please give us a call.
Written by Thomas M. Geier, CPA, CFP®, PFS.
My aim is to offer clarity to your finances. I specialize in helping individuals and families determine what is most important in their financial lives, identify short and long-term goals, and make great choices for achieving comfort, security, and peace of mind.
I graduated from Loyola University in Baltimore, Maryland, and have been a Vice President of our investment management affiliate, Geier Asset Management, Inc, since its founding in 1999. I have over 25 years' experience in financial planning and investment management and am licensed as a Certified Financial Planner® professional, a CPA, and Personal Financial Specialist. I am member of the Personal Financial Planning section of the American Institute of CPS's and Florida Chapter of the Financial Planning Association.