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If you’re considering combining your old 401(k) plan from a previous employer with a current one, there are several factors to be mindful of when making a decision. Factors such as investment options, ease of management, and fees will come into play. Next, we’ll break this down in more detail so you can determine what’s best for you.
One of the primary benefits of rolling over (industry jargon for transferring) your old 401(k) into your current one is consolidation. Having one less extraneous retirement account to keep an eye on helps give you peace of mind knowing that your retirement savings are held in one place. Since retirement funds can be a significant portion of your overall savings, this is an important factor to consider.
Moving your old 401(k) to your current plan also helps streamline the management process. If your retirement timeline or goals change in the future, you’ll have just one account to update as opposed to two or more. You’ll also have less administrative work such as needing to update your address on the old account if you move or other personal life changes take place.
Since 401(k) plan investment options can vary significantly plan-to-plan, having multiple 401(k) accounts increases the possibility that your investment strategies can become misaligned over time. The fund selections and risk profiles between your 401(k) accounts also may not match which can complicate your retirement readiness. While it’s not absolutely necessary, it can be helpful to have your investment allocation generally follow the same strategy. Accomplishing this can be made easier by having your retirement funds in one place.
Since it’s likely that you’ll change jobs multiple times throughout your career, it can become easy to lose track of old 401(k) accounts over time. Companies and 401(k) plan administrators can also merge or become absorbed, further adding to potential complications. Not only can this cause a headache in trying to eventually track these down, getting involved can be stressful and time consuming.
Each employer sponsored 401(k) plan has a different set of investment options available. These differences can be substantial plan-to-plan, ranging from simply not having the funds you’re looking to invest in to limitations around financial advice and service. When looking at the available investment package, ensure the options match your goals, portfolio needs, and risk preferences.
Your cost of investing can be one of your main controllable factors when saving for retirement, as fees have the potential to make a significant impact on your retirement portfolio. Your annual retirement plan fees are typically expressed as a percentage of the amount you have saved and can range from 0.37% on the low end to 1.42% or more the high end. Be sure to thoroughly explore the fees on your account which can include fund fees, transaction fees, and other administrative charges.
If the majority of your retirement funds are not held in your current 401(k) account but kept elsewhere such as an Individual Retirement Account (IRA), then moving your old 401(k) to your current employer may not be the most streamlined option available for you. You may also find limited upside to rolling over if you’re not planning on being at your current job for long or if you’re going to retire soon.
As you evaluate whether you should combine 401(k) accounts, it’s helpful to understand the rollover process so you know what to expect should you decide to go this route moving forward. The process has several steps which is a result of different company rules, government regulation, and ensuring the transfer is secure.
A good place to start is by contacting your current employer’s 401(k) administrator to confirm your current plan can accept external account transfers. If so, you’ll also be able to request the correct rollover instructions so you can send these details to your previous employer. Typically this information contains the deposit details, the address, account number, and other administrative items. Your old 401(k) plan may have a separate set of steps needed to initiate the transfer. Depending on the institution, a phone call may need to be involved to verify these details.
The most seamless rollover option is a direct rollover, or trustee-to-trustee transfer. In this method, the proceeds are made out to the 401(k) plan for your benefit and sent directly to the institution. Once the transfer is sent, oftentimes the remaining process takes place electronically without the money ever touching your hands. For security purposes, some companies opt to send a check with this information directly to you first before forwarding on to the final destination.
Another option outside of a direct rollover is a 60-day rollover, which is when you request the old 401(k) proceeds be made out directly to you. Once the transfer is initiated, you have a 60 day window to deposit the check in an eligible retirement plan. Failing to do so will incur potentially hefty penalties and fees such as a 10% early withdrawal penalty (if younger than 59 ½ ) and treating the distribution as taxable income. You’ll also be subject to mandatory tax withholding of 20% as the relinquishing institution assumes you are cashing out the account. This process is also called an indirect rollover at minimum and should only be pursued if you know you’ll be able to re-deposit the fund within a 60 day window.
While you may not be feeling too eager about undertaking this task, it is becoming easier to make rollovers take place. Our mission is to help facilitate this process quickly and efficiently by providing step-by-step support to ensure your rollover is completed smoothly.
When evaluating options for your old 401(k) retirement account, it can become challenging to determine which option is best. Exploring the factors we’ve discussed can help streamline the decision making process and lessen the stress involved.
By focusing on areas that matter most such as investment options and fees, you’ll be able to first assess critical factors. Also taking into account your goals and retirement preferences will give you a well rounded approach to deciding how you’d like to move forward. As you reflect on the right next step, keep in mind that you can do partial transfers and move only amounts of money you feel comfortable with to start.
Consolidating your 401(k) accounts together can bring peace of mind to your retirement planning and ensure your investment strategy remains aligned. Keeping your funds with an old employer 401(k) may also be a feasible option if the plan is low cost, has good investment options, and you’re not worried about losing track of it down the road. Ultimately, you can feel empowered knowing you have control to optimize these funds in the way that best suits your needs.
