When I started at HelloWallet a few months ago, I needed to think about what to do with my retirement account from my old employer. After a few Internet searches, I was bombarded with 401k rollover offers from many IRA providers. In fact, these IRA providers pay Google up to $27 per click for my eyeball on their website, and it goes without saying, they stand to make a lot of money over next few decades from me if I rollover my 401k with them. But what is best? If you’ve just switched jobs (or have an old 401k you are thinking of moving) you can protect your wallet by keeping 3 things in mind.
- You Are the Customer and in Charge.
Many workers probably don’t realize this, but as long as your balance is more than $5,000 you can leave your 401k with old employer; so there’s no rush to do anything. Take your time and figure out what makes sense for you. Another thing many people probably don’t realize is that many 401ks accept rollovers, meaning you can probably move your retirement nest egg from your old 401k to your new one. Of course, because of aggressive marketing, everyone knows that a third option is a traditional 401k rollover to an IRA. Finally, you can cash your 401k out—but then you won’t have that money for retirement and you will pay a penalty along with other taxes.
- Fees Are The Most Important Thing to Look At.
To figure out 401k rollover strategy is best for you, start looking at the fees you pay, and investment options you have, in your old 401k and your new one. Keep in mind that some 401k providers will increase their fee once you leave employment; so make sure you are getting the most up-to-date fee disclosure, which your plan has to provide. Also remember that a seemingly small fee (like 1 percent of assets) can add up to years of lost savings over time. Once you know what fees you are paying on your old and new 401k (and what the investment options are) you can decide which 401k-rollover option will be cheapest for you or whether to roll over. (My old employer had really low fees for the index funds into which I invest my retirement money, so I just left my money there.)
- IRA providers’ marketing may be biased, aggressive, and misleading.
Remember, IRA providers are marketing their services to you, and they will make a lot of claims that are half-true or downright false. For example, a GAO investigation found that many IRA providers say their accounts are “free” even though account holders would still pay a variety of fees, and only certain fees would be waived for people with high incomes. The same investigation (see video) found that many provider representatives encouraged people to roll over to an IRA without any knowledge of their specific circumstances. And, IRA providers often won’t mention the possibility of keeping money in an existing 401k, and even raise doubts as to whether a participant can move money from one 401k to another! Of course, these companies stand to earn a lot from managing your money, these marking tactics shouldn’t be a surprise.
In conclusion, retirement planning is difficult. Starting a new job can be difficult too, with signing up for a new health plan, a new retirement plan, and learning where to get coffee. I suggest waiting until you have settled into a new job, and then taking a little time to review the options in your new 401k plan, so you can decide how you want to invest for your retirement. Armed with information on your new plan’s fees and options, you can decide whether your old employer was offering you a pretty good deal and leave your money there, whether you new employer’s plan looks great and you should invest in it, or whether an IRA—with all the investment options they offer—would be a good compliment to your new plan.