Broker Check

Should you rollover your old 401(k)?

Gone are the days where workers spend 30+ years at a single company. Companies simply don't incentivize employees to stick around. Typically, leaving your job to go to a new company is one of the best ways to increase your salary and with the elimination of pensions from most employer plans, there isn't a whole lot of retirement benefits to staying. 

When you leave a company, you are allowed to move your retirement account into an IRA. Many people have these old 401(k) accounts sitting with the old provider and don't think much of it. Should you move it? I feel most people leave it where it is because they are intimidated by how to move it or they don't think it will make a difference. Let's go through the different aspects to consider. 

Current provider's fund options

Employer retirement plans are some of the most regulated and scrutinized in the financial industry. This is because they are a key source for retirement savings and could be abused for the benefit of owners or high ranking officials. They have heavy reporting requirements to ensure they are compliant..

I mention this because it typically limits the number of funds you have available to choose from. Having limited options may not allow you to properly diversify your overall portfolio to your individual goals. For example, a typical plan can have a group of target date funds along with a couple stock and bond funds but growth, international, and other specialized funds are nowhere to be found. IRA accounts can have access to hundreds, if not thousands of different funds to invest in that can allow for a more tailored plan to be fitted to your individual needs and more specialized diversification. 

The other downside to limited fund options is the cost. Check out the expense ratios for the funds they offer. I have seen plans where funds' expenses ratios are over 1%. The only guarantee in investing is how much it will cost you and being constrained to high cost funds can erode away your returns. 

The strategies I create for the people I work with are typically between 0.3-0.5% expense ratios. With my standard advisor fee of 1%, this means you are getting professionally managed investments, financial planning, and beneficial advice for a similar, possibly less, cost as these plans.

Does the provider have financial planning?

When it comes to investing, a common belief may be that financial planning begins and ends with picking which funds to invest in. This is technically called investment management.  A good financial planner can tell you this is only a piece of what the financial planning process truly is. 

A retirement plan provider claim to offer "financial planning" as a benefit for plan participants. Many times what they call financial planning is just investment management. True financial planning is a comprehensive process of understanding your short and long term goals while analyzing your income needs, assets, budget, insurance, estate plan, and many other factors while developing a plan to achieving your stated goals.

When it comes to complementary financial planning, you should consider the cost, how thorough it is, and how "personal" the service is likely to be. Are you assigned an individual planner with the experience and credentials to ensure a detailed, thought out plan? Consider the fact that turnover at a large 401(k) plan providers can be high and you may be unlikely to work with the same planner. It can be beneficial to work with someone who develops a personal relationship with you and thinks of you as family.

Also, with the limited amount of fund options we indicated earlier, they may have a few "cookie cutter" plans that they utilize based on broadly assigned investor profiles. 

How is current plan provider compensated?

The financial planning offered by large plans might be advertised as having no cost to participants but keep in mind that they are being compensated in some way. They need to pay their bills. Is your employer paying them to provide the service or are they paid in some other way, such as commissions based on the products they recommend? This can incentivize them to suggest funds that will pay them more versus what is ideal for you.

What is the value provided?

What is the true value of staying in the employer plan? Limited fund options, potential high costs, and limited investment advice may not seem like a lot of value. Ask yourself whether you are willing to bet your financial future and retirement that the plan you have in place will get you to your goals when you want. 

Financial advisors have been shown to provide around 3% incremental returns over time. This can lead to additional years of retirement and less stress when it comes to saving. What is your future worth to you?

Final Thoughts

Whether you move your old 401(k) accounts or not, I just want people to know there are other options out there. You have be early on in your investment career with low-cost options in the plan that fit your needs nicely. Perfect. Keep it where it is at. You may also be further on in your investment career, have multiple accounts, are nearing retirement and need a more tailored plan to fit your needs. In that case, give me a call. The actual process is simple and involves no work for you except meeting with me to go over your situation and reviewing and signing paperwork.