In 2016, the Bureau of Labor statistics reported the average person spends 4.2 years at a single company. That means over a 40-year career the average person could have nine different employers!
There are dozens of reasons why people switch jobs, but that’s not the focus of this article. The focus is on what’s left behind after you leave. In particular, your 401(k) account.
It’s possible to simply do nothing with your old 401(k). Most plans permit former employees to retain their accounts, allowing savings to remain invested. Your employer, however, may also have the option to force you out of the plan by moving your money to an IRA account, or if your account is small enough, by sending you a check in the mail.
It’s valuable to be proactive and to understand your options.
In some instances, it may be wise to leave your money behind. For instance, if your former employer pays a significant portion of plan fees you will want to take that into consideration. Employers have the option to cover all, some, or none of the 401(k) fees. Obviously, the more your employer covers, the less you pay in fees from your account, which should lead to a larger balance over time.
Another reason to keep your savings in your old 401(k) might be the investment options. You may not have access to certain high-quality funds outside of your former employer’s 401(k) plan. Plus, large plans can use their size to negotiate lower fund fees. Even if you can access the same funds outside the 401(k) plan, you are likely to pay a higher annual expense to hold them because of your lack of buying power.
Alternatively, you could roll your money into your new employer’s 401(k) plan. Most plans allow other qualified assets to be rolled in, but it is not a requirement. You should ask. If they do allow rollovers, it may make sense to do so if they have similar or lower fees and/or similar or better investments than your previous plan.
Unfortunately, it’s not always a simple exercise to compare fees and funds on an apples-to-apples basis. If you know a trusted financial advisor, it would be worthwhile to get their two cents.
Rolling your savings into an IRA is another option. IRA accounts often have significantly more investment options. They may also be cheaper, especially if you are able to manage the account yourself.
Lastly, think about the convenience factor. Do you really want to coordinate investments across multiple accounts? Sometimes it’s easier to have everything in one spot.
Take Your Money and Run
Your last option is to simply cash out. Although this option offers the satisfaction of having a lump sum of money to spend, it is typically the poorest choice. The major downside is that the money will be taxed and could incur a 10% penalty, taking a big, nasty bite out of your account balance.
Think about it. Is a big check today worth falling woefully behind on your ultimate retirement goals? In nearly all cases, the answer is a thunderous, “No!”
In the end, it’s your call. Although this article highlights a few major considerations, there are also other factors and strategies to contemplate. Before making any decision, it may be worth your time to speak with a qualified financial advisor.
No matter what you do, your decision will be final. There’s no going back. So, make sure you understand your options.
Odds are it won’t be the last time you are faced with such a decision.