Should I roll my 401(k) to my new employer?

I’ve lost count of the number of prospective clients who have said to me, “I changed jobs recently and I rolled my 401(k) into my new employer’s plan because I needed a place for it to go.”

A little piece of me dies every time I hear those words.  Okay, that might be slightly overdramatic, but so often I wish that I had met this client prior to that decision so that we could walk through the pros and cons of rolling over an existing 401(k) into a new employer’s plan or into an Individual Retirement Account (IRA). 

First, there is a largely held belief that 401(k)s are “Free” meaning without fees to the participant. Even some of my most financially savvy clients believe this to be true.  If you ask your Human Resources department, you are likely to be told that your 401(k) plan is a free employment benefit.  And while the “benefit” is free, the plan itself is not free of fees and hidden costs.

There are several associated costs which are contained in the typical 20-40-page Summary Plan Description you didn’t have time to read. You are not alone. These documents tend to be incredibly dense and difficult to understand.

In Tony Robbins’ best-selling book “Money Master the Game” he lists 17 of the most common fees within a typical 401(k) plan, as shown below.

Communication Expenses:

·      Enrollment materials

·      Ongoing materials

·      Enrollment meetings

·      Investment advice

Record-Keeping and Administrative Expenses:

·      Base fee

·      Per participant fee

·      Per-eligible employee fee

·      Distributions

·      Loans origination

·      Loans maintenance

·      Semiannual discrimination testing

·      5500 filing package

·      Other expenses

Investment Expenses:

·      Base fee

·      Individual (mutual) fund expenses

·      Manger/advisor fee

·      Other asset fees (revenue sharing, wrap administration, etc.)

Trustee Expenses

·      Base fee

·      Per-participant fee

·      Asset charge

When you add the additional service and administrative costs to the investment fees, you will find that your “free” 401(k) is actually not as cost effective as a traditional Individual Retirement Account (IRA) that you hold at a brokerage or bank.

If that’s not enough to convince you that 401(k)s provide a significant headwind for investment growth, another little-known fact is that there is a common practice of mutual fund companies “paying to play” by sharing revenue in exchange for “shelf space” in a 401(k) plan.  What does that mean to you?  It means that the “choices” you have in your 401(k) are not always the best performing funds or the most cost effective, but they could be the ones that paid the most to be offered on the menu of your available funds. 

With a 401(k) you are a “Plan-Participant” which gives you no authority over your investment choices, other than selecting from the options provided by your plan.  The simple truth is that an Individual Retirement Account (IRA) is often a less expensive way to build retirement assets.  Not only do you remove the burden of costly administrative fees, but your investment choices are almost limitless.

The idea of managing your own IRA investment choices may be daunting, but you don’t have to do it alone.  Working with a fee-only, fiduciary advisor is an excellent way to make sure that your investments are properly allocated and diversified to help you reach your retirement goals.  At my firm, when I manage a client’s IRA, it also gives them access to personal financial planning that encompasses all of their goals, not just investment choices.

So, here’s my advice.

• If you’ve retired, changed jobs or your company ownership has changed and you left your 401(k) at your previous employer, consider rolling it over to an IRA in order to reduce overall fees and give you access to more investment options.

• If you have a 401(k) plan that offers an employer match, don’t leave money on the table. Contribute, at least until you reach the full amount your employer will match.

• If you are still working, depending on your income level, you may want to consider diverting some of your income into an IRA, allowing you to have more control over your retirement savings while still reaping the tax benefits.

• Some companies allow plan participants to begin taking 401(k) distributions at age 55, even if they are still working, which means you can withdraw money from your 401k and deposit into an IRA. This strategy allows you to benefit from an employer match if you have one, while also saving on fees and expanding investment options.

Still sound overwhelming?  You can leave the research to us and we’ll be happy to help calculate your plan fees and give you guidance on setting up an IRA if it makes sense for you.