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To Roll, or Not to Roll?

To Roll or Not to Roll?
Harrison Fant, CFP®, AIF®
April 8, 2019

When I first sit down with prospective new clients to learn about their finances, one of the most common issues we come across is how spread out investment accounts are.  We may have a brokerage account here, an IRA there and, very often, an old 401(K) or two still sitting in a previous employer’s plan.  There are plenty of reasons why a 401(K) may be left behind with a prior employer – it could have gotten lost in the shuffle of beginning a new job, it may have just seemed like too much of a hassle to move the plan, or perhaps you took the time to roll the plan into an IRA but your employer made subsequent contributions you didn’t know about.  These accounts, affectionately referred to as “orphans,” are becoming more and more common given the increasing frequency of jobhopping, especially among Millennials.  So, who do these orphan accounts belong to and more importantly, what can be done about them?  Let’s look at some recent statistics:

  • Among investors with at least $50,000 of investable assets, 62% of those ages 18 to 24 have at least one 401(K) from a former employer, per A.T. Kearney’s 2017 Future of Advisor study. The average size of those accounts was $33,000.  (U.S. News and World Report, April 2018)
  • For older Millennials – ages 25 to 34 – 59% had at least one orphan 401(K). Those accounts had an average balance of $47,000.  (U.S. News and World Report, April 2018)
  • Millennials were more likely to have stranded accounts, with 66% of orphan account holders being Millennials. (Data and Research, March 2018)

For those workers who have a retirement plan through their previous employer, there are four options for what to do with the account:

  1. You can leave it with your old employer
  2. You can roll it into your new employer’s 401(K) plan
  3. You can roll it into an IRA
  4. You can cash it out

Note: Of the four options above I will hasten to say that cashing out an old 401(K) is almost always a bad idea.  Not only does this mean taking a step backwards in your retirement savings, but you will also be required to pay income taxes and a 10% penalty on the balance if you’re younger than 59 ½.  Unfortunately though, according to a study by Fidelity Investments, these orphan retirement accounts are in serious danger of being cashed out when reclaimed:  44% of employees between ages 20 and 29 cash out some or all of their 401(K) assets, compared with 38% of those in their 30’s and 33% of employees in their 40’s.  (Fidelity Investments Study, April 2015)

              While it may seem that the easiest route to take is leaving your account invested in your previous employer’s 401(K) plan, here are five reasons why you should consider rolling over an old 401(K) into an IRA:

#1 – You could be paying exorbitant fees

Despite plan administrators being required to disclosure all fees and expenses, many investors don’t actually realize that they’re paying a fee to participate in their employer’s 401(K) plan.  Before you decide to leave your retirement account in your previous employer’s plan, be sure to take a close look at how much you’re being charged for doing so.  That cost might include plan administration fees, investment expenses and individual service fees.  These fees can seem deceptively small, but can add up over time to thousands of lost dollars.

#2 – An IRA may offer you more control and options

Even if your old 401(K) plan offers very reasonable fees, one of the biggest drawbacks to employer-sponsored plans is they typically come with limited investment options.  Recently a client sent us the investment lineup within their 401(K) and it consisted of only seven mutual funds – five large-cap stock funds, one bond fund and a money market.  By rolling the balance of an old plan over into an IRA, you’ll get the luxury of shopping around for and selecting the funds that best meet your goals and objectives.  And by working with an advisor to assist you in the process, you have the opportunity to custom-tailor the mix of investments you use to your unique risk profile and investment objectives.

#3 – How stable is your former employer?

For many employees, being granted company stock or having the option to buy company stock in their 401(K) is considered a great opportunity.  I’ve talked with plenty of workers who also see it as a way to reinvest in their company and take advantage of the growth they’re contributing to through their hard work.  But once you’ve separated from your prior employer and lose touch with their day-to-day operations, being heavily invested in the company’s stock can become a serious gamble.

#4 – Out of sight, out of mind

Perhaps one of the most significant drawbacks to leaving an account in your prior employer’s plan is that our memories are not always reliable.  A study by ING Direct found that 11% of workers with an orphan 401(K) had no idea how much money was in the plan, and the longer you wait to take action the easier it is to forget these accounts.  According to LinkedIn, the new normal for Millennials is to change employers four times in their first ten years out of college – almost double the rate of Generation X.  It isn’t hard to imagine that ten years, and three jobs, later you could entirely forget you have an orphaned 401(K) from an earlier job.

Assuming you do keep track of all of your old retirement plans and could provide the balances of each of them, do you know how those funds are invested?  An account that’s been stranded in an old plan for the last twenty years might still be invested in funds that are more appropriate for the 25-year-old who first enrolled than the 45-year-old investor he or she has become.  Consolidating your various retirement accounts and working with an investment advisor can help ensure you maintain a comfortable level of risk across your portfolio.

#5 – Consolidation means convenience

This could be listed as #1, but they say to save the best for last.  Keeping up with the investment options, beneficiaries and contact information for a single IRA is a whole lot easier than maintaining an array of stranded accounts.  Consolidating your old retirement plans into one IRA can simplify how you manage your overall portfolio, not to mention freeing up head space and reducing the clutter than comes with managing multiple separate accounts.  Consolidating all of these orphaned assets into one managed portfolio may also allow you to access professional advice at lower fee breakpoints than you might otherwise qualify for.

As you can see, there are many factors you should consider when deciding whether to leave money in a previous employer’s retirement plan.  There is a lot to take into consideration when changing jobs, and your retirement funds are a huge piece of that.  If you have an orphaned 401(K) plan, consider whether any of the above reasons apply to you and, if so, talk with us about your options and the process of rolling the plan over into an IRA.

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