What Should You Do with Those Old Retirement Accounts?

July 30, 2020

You’ve worked hard over the years and diligently contributed to your workplace retirement account. You focused on the right things, like proper asset allocation, receiving the full employer match and deferring enough from each paycheck to reach your retirement goals.  After all, you’re not planning to work forever.

What will you do with your 401(k), 403(b) or SIMPLE IRA once you’ve stopped contributing due to retirement or changing jobs?  Should you leave your account balance within the plan or move it?  Whether you are retiring or simply changing jobs, there are a few things you should consider:

Simplify by consolidating.  Having retirement assets within multiple plans can be cumbersome to supervise – different websites, statements, tax forms, etc.  Even if you have a way to aggregate the accounts for supervision, you probably have to call different custodians, advisors, or customer service teams when you have questions or need help.  Moving can trigger more addresses to update to ensure continued communication from each provider.  Consolidating your accounts to an IRA reduces the chance of missing important notifications and makes it easier to supervise your nest egg.

If you’re changing jobs, you have another option: rolling your old account into the new employer’s plan.  Rolling your old 401(k) into the new plan may allow you to continue to take advantage of loan provisions or have a single investment menu to manage. While an IRA may offer flexibility (discussed below), rolling into your new employer plan can still help consolidate to fewer accounts, particularly if your employer-provided plan is your only account. Be sure to evaluate the provisions of your new plan to understand the strengths and weaknesses.

In retirement, if you’ve reached the age for Required Minimum Distributions (RMD) you may need to take distributions from several different sources. Remember that missing RMD’s will come with steep tax penalties.  When you retire, rolling over your workplace retirement account(s) to an IRA can make your life a little easier by reducing the number of distributions.

Choice is important.  Most retirement plans are limited in the number and type of investments they offer.  Often there may only be one or two mutual funds in a particular investing category. In some cases, an asset class may not even be represented.  There are several legitimate reasons for this, but ultimately there are fewer options available.

If you’re looking to invest in individual stocks, bonds, or exchange traded funds, you may not be able to within the plan.  Rolling over plan assets to an IRA may be the only way to get access to such a broad array of investment options.

While fewer choices may not seem to be a big deal, having a different investment line up in each account can complicate your investing strategy.

Don’t forget the fees.  Different accounts carry different fees.  Your 401(k) may include recordkeeping and administrative fees, advisory fees and mutual fund expenses.  If you’re retiring and thinking of taking monthly distributions from your 401(k), remember that there are distribution fees.  These may be once per year or per distribution.  These are a necessary part of operating a 401(k), and you benefit from these services while actively participating in the plan.

Even if you like your workplace retirement plan and feel like it has performed well, you have to weigh the costs with the benefits the plan provides.  Once you’ve left the employer and are no longer contributing to the plan, these services may no longer be worth the expense.  You have the ability to eliminate many of these costs with an IRA rollover.

However, IRAs may have their own costs as well. If you do opt to roll over, be sure to research any fees or charges that may be associated with different providers, like annual account maintenance fees, transaction charges to buy and sell investments, or exchange traded and mutual funds expenses. If you’re looking for an account with guaranteed income provisions, be very cautious about the cost of those guarantees.  Do your research to understand the pros and cons of such an arrangement.

The decision is a personal one.  Transitions, whether to a new job or, ultimately, retirement, take a lot of time and energy. Keeping up with the different provisions among employer-sponsored retirement accounts can be work in of itself.  However, managing retirement accounts across multiple employers and vendors does not have to be an additional burden.  Implementing a consolidation strategy to the investment vehicle of your choice can reduce the effort required.

Our advisors and 401(k) team can help you evaluate your current and future options as you prepare for these life events.  Please reach out to us to get started.