Rolling up, out, and over

The gradual conversion away from pension plans as the primary funding for retirement seems to have put a 401(k) in the hands of the majority of the working population (plus 403(b)s and other similar retirement accounts). The boomers retiring over the coming years might still have a pension on top of their 401(k), but the younger generations almost certainly do not. If used properly, company retirement accounts can be handy tools in your efforts to save for retirement. (A side note on using them properly: no hardship withdrawals, no company stock unless required, no active trading, and maximizing any matches available, among other things.)

But what should you do with the company retirement account when you leave your job for a new employer or ultimately retire? I've seen instances where a client had more than a handful of 401(k) accounts from prior positions, all untouched since they left. Typically, it wasn't part of the plan to accumulate multiple 401(k) accounts, but it's quite common for clients to have confusion about whether or not to roll them over into an IRA.

So what are the most common reasons for rolling out of a 401(k)?

  1. The menu of funds available inside of the plan is undesirable. 
    Since the employer (or an advisor they've hired) calls the shots on the funds available inside the plan, you are stuck with whatever they've designed. Some examples include expensive mutual funds, little diversification, missing asset classes, etc. And that's being nice. I've come across a few terribly designed plans over the years.
  2. You'll achieve greater oversight over your wealth. 
    Having one roll-up view into all of your buckets of money is a powerful way to get on top of your financial plans. 401(k) accounts are the least likely to appear in your consolidated wealth reporting (though it's becoming more widely available, at least among independent advisors). So, for some investors it's a relief to roll over into an IRA and finally have all of their savings in one location.
  3. Company retirement plans are sometimes expensive. 
    Even though you might think of it as an opportunity to pool the resources of the entire company and minimize costs, the management and compliance costs of the plan aren't insignificant. Each plan is different, but even the good ones that care about reducing costs might come in at 1.5% on an annual basis after factoring in fund costs, recordkeeping, and administration.

But surely there are times when it doesn't make sense, right?

  1. You're near the start of your required minimum distributions at age 70.5. Although withdrawals from your IRA are mandatory, active employees (non-owners) can skip RMDs from their 401(k)s.
  2. The benefits of a back-door Roth conversion outweigh all of the other cons listed above. If all of your tax-deferred savings resides in a 401(k), you might have the ability to convert after-tax IRA contributions into a Roth without incurring any additional taxes. This is a highly complex strategy, but still an option for certain situations.

There are plenty more caveats to 401(k)s and other company retirement plans. Happy to chat if you've got a question.