Should you rollover a
401(K) plan into an IRA and should you rollover old 401(K) s into your new
employer’s 401(k) plan?
Many people have 401(k)
plan accounts from previous employers and they are not sure whether they should
roll these funds over to their new employer’s 401(k) plan or to
rollover these funds to an IRA account. When trying to decide which option to
choose, I recommend looking at the quality of the investments that are held
within your new employer’s 401(k) plan and the fees associated with the plan.
Generally, if the
employee works for a very large company, they will probably have a good
selection of investments available. However, if the employee has left a big
company and is now working for a small company, they may be better off leaving
their 401(k) plan assets within the former employer’s 401(K) plan.
Small companies often
charge their employees for record-keeping expenses in addition to mutual fund
management fees. Small company plans may also not qualify for institutional
pricing on the mutual funds held in the plan. Also, on some plans, the
employees may pay sales charges on purchases as well.
Assuming that the current
plan has good investment choices and reasonable fees, it is often easier to
have one custodian holding all of the former retirement assets from previous
employers. It can make asset allocation easier as well. However, some people do
not want to roll the funds together because they are worried about the
viability of the custodians after the 2008 credit crisis and may want to keep
the assets separated for that reason. This is a personal decision.
In addition, the employee
may not have enough money in the new plan to qualify for the maximum loan
amount. By consolidating the previous 401(k) balances into the plan, they may
be able to take advantage of the maximum loan amount of 50% of the account
value (up to $50,000).
Employees must use caution when a broker
recommends that they roll over their 401(k) assets into an IRA. Their incentive
may only be to free up the assets to invest. Again, if the employee is with a
large employer plan, it probably has institutional pricing and the funds inside
the plan have probably been vetted by an investment committee. Moving the money
to the IRA may result in higher fees and less desirable
investments that may not necessarily be in the employee’s best interest.
The bulk of my
practice is working with clients on either an hourly fee basis or through
advisory fees. While I still maintain an insurance license, I rarely use it any
longer after 30 years of being in this business.
If you have
additional questions, please feel free to call my office at 201-843-0044. Also,
check out our website at:
www.wattersfinancial.com
Timothy Watters,
CFP
