Consider the following: you leave your employer and opt to leave your 401(k) as is as you transition into your new role. Then, let’s say your employer updates their business name and transitions to a new investment provider over the course of a few years. As time goes on, let’s say you move to a new home.
This was a reality for one man, who then struggled for 10 subsequent years to gain enough information to get the plan transferred only for the new investment provider to say the check had to be sent to an old address. This struggle could have been avoided if he opted to move his 401(k) to an IRA or his new employer’s retirement plan. Here is why you shouldn’t leave your 401(k) with a past employer.
Control And Flexibility
When a business chooses to close its doors for good, it is their duty to close out any applicable retirement plans as well. If the employer cannot contact the plan participant, they could opt to cut a check, forcing the participant to either complete a rollover transaction on their own within 60 days or pay taxes and potentially tax penalties on the distribution.
When you leave a 401(k) at a past employer, you are susceptible to changes with that employer and their plan. When you roll your plan into an individual retirement account, you gain complete control over the plan, and you may have the ability to continue contributing as well.
Costs
Costs can often increase when you leave an employer. For active participants, employers may opt to cover certain administrative fees and investment costs. Depending on the plan provisions, this may end when participants become inactive. According to Investopedia, average 401(k) fees range between .5% and 2% based on the size of the plan. You may end up saving on significant costs by moving to an individual retirement account or to an active employer plan.
Many 401(k)s also charge check-writing fees every time you distribute money from your account, whereas most individual retirement accounts do not. This means that while you might pay an initial cost for rolling funds over, you would be avoiding that same fee on all subsequent withdrawals.
Investment Choices
Employer plans often come with restrictions about what kind of investment options are available within the plan. Usually, the lineup includes about 30 funds. Most people end up defaulted into target date retirement funds, which are a pre-set mix of investment options designed to become more conservative as you approach 65 years old. You may have the option to move into a self-directed account but that option may come with additional costs to you.
Your investment options inside of an individual retirement account are virtually limitless. Though you may not want all of these asset classes, you can choose to invest in individual stocks and bonds, real estate, cryptocurrency, private equity, derivatives, and more.
Planning Opportunities
When you move an employer plan into an individual retirement account with an investment advisor, you may have some planning opportunities open to you. Advisors may be able to benchmark your plan, provide a progress report on all your financial goals, and offer tax and investment opportunities you may not otherwise have access to.
Conclusion
Leaving your 401(k) with a past employer can lead to complications and missed opportunities. By transferring your funds to an IRA or your new employer’s retirement plan, you gain greater control, flexibility, and potentially lower costs. Additionally, you can access a wider range of investment options and planning opportunities, ensuring your retirement savings are better aligned with your financial goals.
This informational and educational article does not offer or constitute, and should not be relied upon as, tax or financial advice. Your unique needs, goals and circumstances require the individualized attention of your own tax and financial professionals whose advice and services will prevail over any information provided in this article. Equitable Advisors, LLC and its associates and affiliates do not provide tax or legal advice or services. Equitable Advisors, LLC (Equitable Financial Advisors in MI and TN) and its affiliates do not endorse, approve or make any representations as to the accuracy, completeness or appropriateness of any part of any content linked to from this article.
Cicely Jones (CA Insurance Lic. #: 0K81625) offers securities through Equitable Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC (Equitable Financial Advisors in MI & TN) and offers annuity and insurance products through Equitable Network, LLC, which conducts business in California as Equitable Network Insurance Agency of California, LLC). Financial Professionals may transact business and/or respond to inquiries only in state(s) in which they are properly qualified. Any compensation that Ms. Jones may receive for the publication of this article is earned separate from, and entirely outside of her capacities with, Equitable Advisors, LLC and Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC). AGE-7491277.1 (3/25)(exp. 3/29)
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