You have an old 401(k) (or other company retirement plan) your former employer is telling you to do something with or you feel is hanging out there aimlessly. You need to “take care of it” one way or another.
It’s the #1 reason people reach out to me as a financial planner. It’s also the exact situation financial advisors seek to prey upon because it’s the easiest way to gather assets on which to make a fee or commission.
That leaves you, holder of the old 401(k), in a tough spot. You want to get closure on this account, but you don’t know how, and you don’t know who to trust to help you figure it out. There is no clear path ahead. It’s a crummy feeling.
In 5 minutes, let’s clear your path so you’ll know how to handle your old 401(k).
First, you don’t have to do anything with the old 401(k). You can leave it there if you’d like.
Is that the best decision? It depends. Worst case scenario is the plan provider will boot you out, send you a check for the proceeds minus tax and penalty withholdings. Those withholdings won’t be a lot in dollar terms, because providers usually only boot you out of the plan if your balance is small (usually $5,000 or less).
So what would it look like just to leave it where it is? Why would you do that?
Old 401(k)s may afford you benefits you can’t find anywhere else. There are a few benefits to look out for. First, do you have company stock in this plan? If yes, you have to consider your long term tax plan. The retirement plan structure gives you options with how to treat that stock in the most tax efficient manner possible. How that works is beyond the scope of this post, so get professional help if you own a lot of company stock (more than 5% of your net worth).
Second, does your old 401(k) offer you access to investments no other plan or provider can? Some company plans have negotiated some sweet investment options, most commonly a stable value or guaranteed fund that pays a more robust interest rate than relative alternatives.
Finally, by moving the old 401(k), will it be subjected to new expenses and fees? As mentioned earlier, the financial advising sales force is always interested in folks moving old 401(k)s so they can make a sale.
But that doesn’t mean leaving it is your best choice because…
Your old 401(k) may be awful. Awful would be defined by three factors: high costs, poor investment selection, and shabby service/user interface.
How do you know if the costs of your plan are high? First, know what you’re looking for. The costs most commonly assessed on you are fund expenses (expressed as an expense ratio), advisory fees, and recordkeeping fees.
Next, login into your old 401(k)’s online account access (if you don’t know how, reach out to the HR person in your old company), then within the website, find the Summary Plan Description. It should be available to you in PDF format.
Once you’ve opened the PDF, do a CTRL+F (or COMMAND+F) to pull up the document search and try using any of the following terms: fees, expense(s), commission, charges. That should lead you to the content you’re looking for to determine what costs your old 401(k) levies. If it doesn’t, keep searching the website, the information is likely there. Still no luck? Call the customer service # to get help. Information on costs is too important to remain naive.
How do you know if your plan has poor investment selections? This is tough, because everyone’s investment preferences are different depending on their perceptions, experience, beliefs, and risk tolerance. Very generally and simply speaking, I’m looking for low cost, highly diversified options in stocks and bonds. That is enough for me to have confidence an investor can be successful.
Finally, you’ll know if your old 401(k) has shabby service or a complex user interface by answering this one question: is it difficult for you to access, get information on, and make changes to your retirement plan? If you’ve tried to work with your old 401(k) and you find any of that to be true, then you need to simplify by moving the account.
If there is a high risk your old 401(k) will fall into your “out of sight, out of mind” mental category, neglect could wage a high cost, and you should move it. Change happens in life and these assets may need altered in response. But you’ll never know if the old plan is basically abandoned as an afterthought.
There lies the single most powerful factor in deciding what to do with your old 401k. It needs to be in a place where it can empower your decisions today. However many assets you have in the account, they should be aiding in your pursuit of the most important matters in life, whether now or in the future.
Alright, I need to move my old 401(k), what do I do?
Let’s say for any of the reasons above, you’ve decided you need to rollover (the technical term for moving your account) your old 401(k). You’ve got a couple more questions to ask yourself: How capable are you to find a solution without paying for help? And if you’re not capable, where’s the best place to turn?
If you have financial savvy and some time to dedicate the required work and enjoy working with your assets, then you do not need to pay for help. But those three factors found together are rare.
Even if you don’t have all those working for you, you’re still not without options. In fact, your most simple, cost effective option is to open an IRA account with Vanguard (whom Warren Buffett recommends). Vanguard has a customer service force ready to guide you through your next steps (beware though, some customer service folks are more helpful than others).
However, you are likely part of the 90% (that’s a guesstimate) of people who would gladly pay for some personalized guidance on your old 401(k). It’s great when you can take the burden off yourself. You may not have the confidence, the time, the energy, or the focus to make the right choices with your account.
Then I have no hesitation recommending you find and pay for professional help. My only plea is this: know how you’re paying for the advice and know your alternative options. If you do those two things, you will be able to find professional, knowledgable help with your retirement plan account.
Okay, so it’s not simple to make a confident decision with how to handle that old 401(k), but by going through the progression I’ve listed above, you’ll gain the confidence this account is in the place that’s best for you.