Client Question: Former 401k Plan

June 8, 2023

I received a question from a client this week, sparked by a recent job change. He has a 401k plan (at his now former employer) and was wondering what to do with that account. With today’s job market strength and the tendency of people to change jobs more frequently, this is a relatively common question so I thought it was worth covering more broadly.

Involved Decision

Let me start by saying that the decision on what to do with a 401k account is a very involved process and should be carefully assessed on a case by case basis. There is no “one size fits all” answer. Such transactions are also subject to heightened regulatory rules (see below).

As a result, please note that the below information is meant to be educational – and not individualized advice. I’ll outline the options you can consider when it comes to 401k plans and discuss some key information you (and your advisors) should evaluate very carefully before any action is taken.

And as a reminder, when it comes to determining what is right for you and your retirement account, be sure to work with your team of advisors or complete the evaluation yourself if you so choose.

Department of Labor Oversight

401k plans (and other employer-sponsored plans like 403b plans, as well as Individual Retirement Accounts) typically represent a very meaningful portion of individuals’ retirement funds. There has been ongoing debates about how to regulate transactions concerning these accounts and provide protection for individuals.

In 2022, the Department of Labor released comprehensive regulatory guidelines for investment advisors providing advice on retirement account rollovers (ie: moving assets from one retirement plan/account to another). Windermere takes this guidance very seriously and follows these specified regulatory procedures for any situation involving a client rolling over a retirement account. The following educational insights comes in part from that guidance but again, is not meant to serve as a recommendation or cover that guidance in its entirety.

Options for a 401k plan

A 401k plan is a retirement plan sponsored by a given employer. When you leave a job, you have a few options on what to do with that legacy 401k account. In most cases, you will have the option to leave it in the legacy plan (and adjust the investments as needed). You may also have a choice at your new employer to roll your prior plan into their 401k plan. You are also able to roll the retirement assets into an IRA (traditional IRA for pre-tax funds, Roth IRA for roth funds). Lastly, you can always withdraw the funds and pay taxes and penalties (usually not a viable choice given the impact of taxes on the long-term compounding of those funds)

The amount of choices alone should make it clear why it can be an overwhelming decision for most individuals. How do you know which one is right for you? Again, it is a complex decision process that should be addressed on a case-by-case basis. However, here are a few things you may wish to research if you find yourself in this position.

Items to Consider & Research

Investment options – every 401k plan offers different investment options. Pull the listing of investment choices for your legacy plan and new plan – and determine if one is preferable based on your goals, investment strategy, and target allocation. If you are considering moving funds to an IRA (ie: outside of an employer plan) you will have unlimited investment options (ETFs, mutual funds, individual stocks). Depending on your skillset and interests, that may or may not be a benefit

Investment and plan fees- every 401k will also have fees associated with being in the the plan, as well as fees on the underlying investment choices discussed above. 401k plans are often able to access share classes that have lower fee rates than an individual can obtain on their own. Further, some plans cover some of the administrative and other fees on behalf of employees, so that is worth evaluating as well. Consider the fees you will pay if you move to an IRA account instead. And if you do move funds to an IRA under a financial advisor management, be sure to include those management fees as well

Other services – some employer plans include other services – such as financial coaching or retirement planning. Consider those services – and compare those offered by the new plan or another advisor if you are moving to an IRA under their management

Legal implications – there are different legal protections and features that apply to employer plans but not IRAs (items such as distributions, ability to take loans, protection from creditors, etc). It’s worth thinking longer-term about these accounts and what will serve you best

Consolidation wishes – our financial lives are complicated and tend to only get more complicated as we age. While it’s a more qualitative factor vs quantitative factor, consolidation should be included in your decision. Will it serve you to have only one 401k account (ie: roll old into new) or to have all your accounts under consolidated management (ie: roll old 401k to an IRA managed by your advisor). This is important to consider as well

As you can see, there is a lot of information to evaluate and options to compare and contrast. It takes time to gather the information on each plan – as well as an IRA account if that is being considered. However, once you start to do the analysis for your specific situation, it will likely become clear what the best path forward is for you and your retirement funds.

Happy evaluating!

Note: All commentary above is as of the date of this post and is for education and informational purposes only. Windermere and its principals do not intend for this to serve as investment advice and are not responsible for any actions taken based on this article.

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