 Roll Over (k)-thoven
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By Scott
Lummer
Chief Investment Officer, mPower
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Surprised you, didn't I? You probably thought I'd choose a
title with an Olympic twist, since that's what everyone's talking about these days, and
instead I paid homage to rock 'n roll great Chuck Berry. Why? To be honest, I have been so
engrossed in watching the Olympics — particularly synchronized javelin throwing
— that I haven't had much time to be creative. But I promised my editor that I'd make
several gratuitous Olympic references in the column.
As you might guess from the title, this week's column
explores whether there is a 401(k) afterlife — after leaving your employer, that is.
Here's the question I received from a reader:
I recently changed jobs and was considering leaving my
401(k) intact with my old employer. Assuming that my old employer's plan has a sufficient
number of investment alternatives to accommodate a variety of strategies, would there be
any reason to roll the account into my new employer's plan? I expect to retire within 10
years, and the amount involved is in the six-figure range.
First of all, I want to point out that you actually have
three options (hmm, the same as the number of Olympic medals for each event). They are:
- Leave the money in the old plan,
- Roll the money into your new employer's plan, or
- Put the money into a rollover IRA
The third option means you need to select a mutual fund
company, broker-dealer, or other financial institution to set up the plan for you.
There is a fourth option, taking cash, but I won't include
it on the list because it is definitely not a medal-winning strategy. You open yourself up
to losing money through taxes, penalties and lost investment opportunity, all of which
should be banned substances (another Olympic term).
Depending on the respective plans and your goals, any of
these options might work well for you. There are five factors (wow, the same as the number
of rings on the Olympic flag) that might sway you in making your decision — expenses,
investment options, features, flexibility, and convenience. Let's analyze each one.
Expenses
You should look at the fees charged by both plans. All
other things being equal, you want to choose a plan with lower fees. In general, larger
plans tend to have lower administrative and money management expenses (or management fees
than smaller ones; so if your former employer is a larger company than your current
employer, you might find that your former plan is better from this point of view. If your
new employer is larger, you might prefer to move the money into your new plan. If neither
company is very large (that was my situation when I joined my current employer three years
ago), you might be better off rolling your money into a rollover IRA.
Remember, unlike in Olympic weight lifting, size isn't the
determining factor here — you should start your research by finding out from your
human resources office or the plan administrators what fees are charged to the different
plans.
Investment Options
Some plans have a great selection of investment options.
Unfortunately, many do not. For example, my previous employer had very poorly performing
and expensive investment choices (it was the Jamaican bobsled team of 401(k) plans). I
knew when I left that I would roll the money over into either my current employer's 401(k)
plan or an IRA.
If you decide to put your money into a rollover IRA, you
get to choose the provider. This means that you are virtually guaranteed a good selection
of investment options with a rollover IRA, as long as you do your homework when choosing a
provider.
However, some of the very largest companies have separate
accounts that use institutional-quality private managers that may not be accessible
through mutual funds. In those cases, the 401(k) plan of the current or previous employer
may be preferred to a rollover IRA.
Features
Some 401(k) plans have very cool features, such as
automatic rebalancing, great education, investment advice, and even a full-length bodysuit
that improves your swimming time. If those features are valuable to you, they may sway
your decision.
Flexibility
In general, 401(k) plans are more flexible because they
allow you to borrow against the plan. Of course, I don't think this is a good idea (you
can read why in my previous column, Shakespeare in Debt, but the lack of borrowing ability
might dissuade you from the rollover IRA. On the other hand, it is generally easier to
withdraw money before age 59ý from an IRA than a 401(k) for a first-home purchase or
higher education expenses, so that should also be factored into your decision.
Convenience
Who wants to have to keep track of several different 401(k)
plans? Think of the paperwork! It's much easier to have all of your money in one or two
accounts, so it's more convenient to roll your money into either the current employer's
plan or an IRA. Also, depending on what kind of terms you are on with your former
employer, it may be more convenient not to maintain a connection.
Closing Ceremony
There is no hard-and-fast rule about whether to leave your
401(k) with your old employer or roll it over when you change employers. For many people,
it makes sense to do a rollover — either into the current employer's plan or into an
IRA. However, there are always exceptions, such as if your former employer has a great
plan with a good selection of excellent-performing, low-expense funds, and several helpful
extra features.
By the way, if you decide to do a rollover, there are
advantages to having your employer transfer the money directly into the new account rather
than making out a check to you, which you then deposit. See our article on rollovers for
more information.
Now, if you'll excuse me, I have to go watch the Olympic
gymnasts roll over — I promised I'd tell Tchaikovsky the news.
 Lummer's Logic Archives
The information provided here is intended to help you understand the general issue and
does not constitute any tax, investment or legal advice. Consult your financial, tax or
legal advisor regarding your own unique situation and your company's benefits
representative for rules specific to your plan.
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