Should you rollover a 401(K) plan into an IRA and should you rollover old 401(K) s into your new employer’s 401(k) plan?
Many people have 401(k) plan accounts from previous employers and they are not sure whether they should roll these funds over to their new employer’s 401(k) plan or to rollover these funds to an IRA account. When trying to decide which option to choose, I recommend looking at the quality of the investments that are held within your new employer’s 401(k) plan and the fees associated with the plan.
Generally, if the employee works for a very large company, they will probably have a good selection of investments available. However, if the employee has left a big company and is now working for a small company, they may be better off leaving their 401(k) plan assets within the former employer’s 401(K) plan.
Small companies often charge their employees for record-keeping expenses in addition to mutual fund management fees. Small company plans may also not qualify for institutional pricing on the mutual funds held in the plan. Also, on some plans, the employeesmay pay sales charges on purchases as well.
Assuming that the current plan has good investment choices and reasonable fees, it is often easier to have one custodian holding all of the former retirement assets from previous employers. It can make asset allocation easier as well. However, some people do not want to roll the funds together because they are worried about the viability of the custodians after the 2008 credit crisis and may want to keep the assets separated for that reason. This is a personal decision.
In addition, the employee may not have enough money in the new plan to qualify for the maximum loan amount. By consolidating the previous 401(k) balances into the plan, they may be able to take advantage of the maximum loan amount of 50% of the account value (up to $50,000).
Employees must use caution when a broker recommends that they roll over their 401(k) assets into an IRA. Their incentive may only be to free up the assets to invest. Again, if the employee is with a large employer plan, it probably has institutional pricing and the funds inside the plan have probably been vetted by an investment committee. Moving the money to the IRA may result in higher fees and less desirable investments that may not necessarily be in the employee’s best interest.
The bulk of my practice is working with clients on either an hourly fee basis or through advisory fees. While I still maintain an insurance license, I rarely use it any longer after 30 years of being in this business.
If you have additional questions, please feel free to call my office at 201-843-0044. Also, check out our website at:
Timothy Watters, CFP