What to do with an old 401(k)

The jury is still out on whether it’s best for people to keep a string of old 401(k) accounts from previous jobs or roll them into a new company plan or personal IRA. There are pros and cons to leaving your money where it is or taking it out and putting it somewhere else that is more actively managed.

Aaron Grey, managing partner at Denver Money Manager, says people should consider rolling those accounts over into an IRA because IRAs are cheaper to maintain and have more investment options.

“Every 401(k) has a fixed menu of options, 20 to 40 funds to choose from, not that they are necessarily terrible menus, but they are limited,” he said. “Rolling over to a rollover IRA opens up a universe of investment options.”

Grey, a registered investment advisor since 2003, said that “just because each 401(k) plan is its own operating entity, it is not cheap to provide a 401(k) plan as an employer. Some of those expenses are shared by plan participants through increased internal expense ratios. In most cases, even if you love the lineup of funds in your 401(k) and see no need for an increased [investment] universe, by rolling it into an IRA you can [invest in the same options] at a lower cost than owning them in a 401(k).”

David Wray, president of the Plan Sponsor Council of America, disagrees that IRAs are cheaper to operate than defined contribution plans, when you compare the services that are available to 401(k) plan participants, like access to a financial advisor. He does agree that rolling over old accounts into a new retirement account makes sense, at least from the perspective of small plan sponsors.

“Very small companies are required to have a plan audit if they have 100 or more participants. Participants are defined as anyone with an account balance, which includes terminated vested employees,” Wray said. “Smaller employers would prefer that terminated vested employees roll [their accounts] into IRAs because a 40-employee company doesn’t want to have to pay $25,000 for an audit.”

According to Wray, employers in the United States are dealing with millions of dollars in terminated vested accounts. Under the law, if accounts are over $5,000, the money can stay until a person is 65 or chooses to take it out, he said.

For smaller companies, this can be a burden. For large plans, with more than 1,000 employees, it is in their best interest to keep those terminated vested accounts because their institutional pricing is based on their assets.

“People are better off leaving their money in a 401(k) plan than rolling it to an IRA because the plan sponsor is picking funds or has hired expertise to pick funds. It’s like hiring a personal investment manager,” Wray said.

According to Charles Schwab, there are four things people can do with their 401(k) plans when they leave a job: take the cash, do nothing, rollover their 401(k) to their new employer’s plan or roll that money into a personal IRA.

Experts agree that cashing out is a bad idea because it permanently decreases future retirement savings. The money a worker saves early on, when he is in his 20s or 30s, is worth much more than the same amount saved at an older age.

Doing nothing means a participant’s money will sit and accrue interest on what was there when they left their job. Nothing will be added to the account except investment returns. This can be good if your account is invested in the right balance of assets, or bad if a participant never looks at that plan’s holdings again after they leave the company.

Rolling accounts over to a new employer plan is a great option because it can be done without penalty and workers are more likely to keep track of funds they are actively paying into. The one downside to this plan is you are limited by the retirement plan choices your new employer has made. Experts agree that you should research your options before making a decision.

Rolling over to an IRA gives account holders more flexibility, but most do come with annual fees.

One reason Grey encourages his clients to rollover their old plans is that “it is really difficult to plan and have a full understanding of your financial picture if your money is spread all over the place, $50,000 over here; $30,000 over there. It is difficult to put your arms around where you stand financially.”

He added that Denver Money Manager advocates consolidating funds and bringing them under one roof because it gives a clear picture of where people stand. Are they on target to achieve their retirement objectives or do they need to play catch-up? “It is hard to make quantifiable judgments without it being under one house,” Grey said.

One thing to watch out for when leaving a job with a retirement plan is that each one has its own rules, policies and procedures and the “beneficiary protocol can be specific to that plan,” Grey said. “You don’t want any surprises with your beneficiaries.”

Don’t assume your money will go to your spouse or your children when you pass away. Read the fine print, he said.