Question: D.L. in Crestview Hills: I can’t decide if I should keep my 401(k) with my old employer or roll it over to my IRA. Can you help?
A: First, for purposes of this answer, we’re going to assume you have more than $5,000 in that 401(k) – otherwise, your former employer doesn’t have to allow you to leave it behind. Now, with that out of the way, the key to remember here is that a decision like this essentially comes down to two things: Fees and convenience.
If you’re someone who’s organized and you trust yourself to keep track of multiple accounts it might be fine to leave your 401(k) with your old employer. But if you’re not, rolling it over could make more sense for the sake of ease and simplicity. And keep this in mind: You can’t contribute to a former employer’s plan, so if you leave it behind, you need to be saving in your new employer’s plan (or, if you no longer have any access to an employer-sponsored 401(k), some other account that’s earmarked for retirement).
And now the biggie: Fees. Generally speaking, IRA fees are typically more expensive than 401(k) fees because employer plans can negotiate lower fees, kind of like getting a ‘bulk’ discount. And a recent study from Pew Charitable Trusts re-confirmed this fact. In its study, Pew found that, on average, ‘retail’ investors (the folks who open IRAs on their own) paid a 0.34% higher expense ratio for mutual funds than the ‘institutional’ investors who are in employer 401(k) plans. And while that doesn’t sound like a lot, it can add up over time.
Here's The Allworth Advice: Take a look at your 401(k)’s fees and compare them to your IRA’s. But don’t forget to also take the ‘mirror test’ – if you decide to leave your money in your former employer’s plan, will you be organized enough to keep track of it and remember to incorporate it into your overall retirement strategy?
Q: Lynn in Sharonville: My company just switched 401(k) providers. Is this good? Bad? Should I do anything?
A: Something like this typically happens when an employer is unsatisfied with the investment performance, services, recordkeeping, and/or fees of its current 401(k) plan administrator. So, this move to a new administrator isn’t necessarily ‘good’ or ‘bad.’ It just ‘is’ – though, hopefully, you’ll see some kind of benefit from this switch in the long run. If you’re curious, don’t be afraid to ask about the motivation behind the change.
And while uncommon, mistakes can sometimes happen during the changeover. Make sure you take a look at your account once the dust has settled. Review your balance to ensure your full account was transferred; check to see if your investment mix is still as you want it since fund options can often change; and confirm that your contribution levels are also correct. (This can also be a good time to reassess your 401(k) strategy in general.)