Retirement: The good and bad of 401(k) rollovers
“If you are moving on from your employer, shouldn’t your money move on as well?” asked Peter Lazaroff in The Wall Street Journal. Rolling a 401(k) into an individual retirement account when you leave a job is an “automatic move for many investors,” but there are times when it makes more sense to leave your money where it is. The most important thing to consider is expenses. It could be that your current 401(k) plan is cheaper than an IRA. If the company you’re leaving has more than 50 employees, there’s a “good chance” that your plan’s all-in cost—which includes fund expenses, adviser fees, and administration costs—is less than 1 percent. This information is listed in your plan’s quarterly statements. If a financial adviser recommends rolling over your 401(k) into an IRA, “you should ask what the all-in cost is to you.”
A 401(k) plan also comes with some perks that an IRA doesn’t, said Sandra Block in Kiplinger.com. Sticking with your current 401(k) plan might make sense if you’re going to retire early. Generally, retirees have to pay a 10 percent earlywithdrawal penalty for taking money out of an IRA or 401(k) before age 59½. But “workers who leave their jobs in the calendar year they turn 55 or later can take penalty-free withdrawals from that employer’s 401(k) plan.” Your 401(k) assets are also shielded from lawsuits and creditors; “IRAs don’t offer that same level of protection.” However, if you’ve changed jobs frequently, consolidating your plans in an IRA “could help you streamline your investments.” IRAs also tend to offer more flexibility when it comes to making withdrawals or selling investments.
Take your time with the decision, said Jeff Rose in Forbes.com. There’s no deadline to roll over your 401(k) plan, and your former employer can’t tell you how to handle the cash inside your account. “Even if your employer sends a letter suggesting you consider your options, they cannot compel you to do anything you don’t want.” There’s one big exception, said Ron Lieber in The New York Times. Employers can automatically roll over any 401(k) account that accumulated $5,000 or less in savings while the employee worked at the company. Regulations stipulate that the money be moved into “safe” investments, often a low-yielding money-market account. Over time, the fees on these low-earning accounts can easily eat up a small investment. “So if you’re leaving a job and you get a letter from your 401(k) administrator telling you that your money will end up in one of these IRAs if you don’t act—well, act.”