Back in the day, preparing for retirement was a simpler
situation: In most cases, you’d work for a company or government agency for a
certain number of years, retire, collect your pension and Social Security
payments, and voila! Your retirement was taken care of.
Nowadays, the average worker will have 12 jobs over the
course of their life, and if they’re lucky enough to have retirement savings
benefits offered by an employer, it typically comes in a tax-deferred 401(k)
rather than a pension.
For every company you work for, you’re often creating a
trail of retirement accounts with various levels of funding spread across
different employers and benefits administrators. That’s why it’s necessary to
keep track of all of your investments and know when the time is right to roll
over your 401(k) from a former employer into a different retirement account.
There are a number of reasons why a 401(k) rollover might be
a smart move: You could prefer the investment choices in your new employer’s
plan or your local bank’s IRA offerings, you might want to organize your
retirement accounts to better track your savings progress, or you could even be
forced out of an old employer’s 401(k).
Here’s everything you need to consider when deciding whether
or not to roll over your 401(k):
Assessing your 401(k) situation:
The first thing you’ll want to do is take a look at your
current retirement set up. Figure out how much money you currently have in any
employer-sponsored 401(k)s or separate IRAs, what sorts of investments they’ve
been allocated to and how those investments are performing.
Do you have a choice in whether you roll over an old
401(k)?
It might surprise you to learn that former employers
absolutely can — and often do — kick people out of their prior company’s 401(k)
plan.
“An employer is the one that’s really paying for any fees in
your retirement account,” says Andrew Meadows, senior vice president at
Ubiquity Retirement + Savings. “So if you’re below a certain balance, the law
says you can be kicked out of your plan in order to reduce costs for the
employer.”
This is known as a “force-out” that, pursuant to IRS
guidelines, allows employers to remove previous employees from their retirement
plan if they have less than $5,000 vested in the account. While it’s not an
issue for everyone, if you have less than $5,000 in an old employer’s plan,
then you might have found yourself on the receiving end of a notice to take
action.
If you miss the deadline to take action and roll over the
money yourself, your former employer is required to move the balance to a
low-cost IRA if it is more than $1,000. If it’s less than $1,000, they have the
option to just write you a check, and you will then be penalized for an early
withdrawal if you do not deposit it into a retirement savings account within 60
days.
If your old 401(k) has more than $5,000, how is it
performing?
As with any investment, the goal is to generate more money
than you started with. If you have a higher retirement balance with strong
returns, then Meadows says nothing is stopping you from just keeping the
account as is.
“You can evaluate if you should [roll over] based on how
those investments are doing,” he says. “You might have some strong performing,
low-cost investments and not want to move it.”
If that’s not the case, or you just like some of the
investing options available to you either through your new employer’s plan or
an IRA, then doing a rollover could be a good option. This is especially true
if you find yourself with more than one account leftover from a previous job.
In fact, it’s a good idea to use this time to check in not only on the 401(k)
from your previous employer, but at any other retirement savings accounts you
may have acquired over your career.
Fees to consider before you roll over a 401(k):
You’ll want to pay close attention to the fees in your old
employer’s account (if you’re weighing whether to keep your money there), as
well as the fees in your new employer’s 401(k) or any IRAs you may be
considering.
Many savers don’t realize this, but 401(k)s have a variety
of fees associated with them, from the individual funds you’ve invested in to
administrative fees from the provider itself — they’re just usually quietly
taken out of the account over time. You don’t have much control over the
investment options your employer offers in its 401(k), but you do typically
have the option to pick certain funds, so be sure to look for the lower-cost
options.
If you’re looking to roll over your 401(k) into a
traditional or Roth IRA, you’ll have to do more shopping to research how the
fee structures will work for different types of investments and account
providers. There are a few broad types of fees in an IRA you should look for.
First up: maintenance fees, which can be charged as a
percentage of your assets or a flat annual fee. Many brokerages no longer
charge this fee, especially for passively managed funds.
Then there’s the investment fees, known as the expense
ratio, for the underlying mutual funds and exchange-traded funds in your IRA.
For these, look for a fee well below 1%. (The average expense ratio falls
around 0.5%)
Finally, when looking at fees related to investing, Meadows
recommends avoiding IRAs that charge transaction fees, which are applied when
you sell funds, or load fees, which are charged when you make deposits into
your account.
Passively managed accounts will always have a lower cost
than actively managed accounts, where you’re paying for an investment manager
to make decisions about your funds. In theory, there’s nothing wrong with
paying extra for great performance in an actively managed fund, but be
realistic: very few actively managed funds consistently outperform the market.
“I highly advise anyone to check your fees on a regular
basis,” Meadows says. “The closer you get to retirement, the more you’re going
to worry about how those fees are eroding your savings.”
How to actually start the 401(k) rollover process:
Once you decide to roll over a 401(k), the next step is to
figure out where your money can go and how you can most successfully set
yourself up for a secure retirement. Here’s how to roll over a 401(k).
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