It used to be that you went to work for a company, stayed for 40 years, retired with a pension, and maybe got a nice watch as a going away present. Anymore, that is a rarity. Now, the average American changes jobs about every 4 years. This has a profound impact on most people’s ability to save for retirement.
So you’ve left your job and have an old retirement plan. What do you do? What are your options?
The easiest solution is simply to leave it behind. Many retirement plans will allow you to leave your money behind once you leave the company. For some, this might be the best solution, particularly if you’ve retired and are over 55 years old but not yet 59 ½ years old. However, for many people this can be a mistake. Here’s some reasons why...
The largest employer in Cedar Rapids, IA went through three different names and two different 401k providers, all within about a two-year time span. If it can happen with a large employer, it can certainly happen with a smaller one!
Your old company can change 401k providers at any time, and there’s lots of them out there. If you think your money’s at Vanguard, but it really transferred over to Fidelity (or any of the dozens of other major providers), it can be hard to track down.
Workplace retirement plans often have limited investment options. Sometimes those options can be great and low cost, however this is not always the case. It’s often difficult to find that information out. Many plans are limited to a dozen or so investment options, which may not be the right fit for you.
Changes in your situation
What if you move? Will you remember to contact every one of your old employer 401k plans? What if you get married, particularly if you change your last name? Regardless of name change, you probably want your new spouse to be the beneficiary of that account, but unless you contact the provider, that won’t be the case.
One 401k plan at your current company is pretty easy to keep track of. You probably know someone in HR that can help you if you need it. But what if you have a handful of old accounts, how do you keep them all organized?
While some 401k plans offer investment advice (usually for an additional fee), most do not. Are you confident the way that account is invested still matches your overall goals and objectives?
Thankfully, you don’t have to leave your money behind. You have options, some better than others. One option rarely used is to cash it out. It’s tempting, especially if it’s a small amount of money. You might think, why bother with it, and hey, you could use the money right now anyway, right? Wrong. Cashing out retirement plans often generate income taxes on the money withdrawn, and if you’re not over 59 ½, you’ll face an additional 10% penalty. The biggest problem with cashing it out, though, is that you don’t give yourself time in the market to compound that growth.
A better solution for that money for some people might be to roll it over to your new employers plan. Most, but not all, employer plans allow you to bring over old retirement money. This would avoid taxes and penalties, allow you to keep growing the money, and make it easier to keep track of since you’re actively working there. There can be pitfalls with this option, too. Your new plan may be more or less expensive than the old one. The new plan will likely have limited investment options as well, which might be worse than your old ones. Your new plan may not have the option to give you investment and financial advice. In fact, your new employer might not have a retirement plan at all, which can be a problem!
Another option is to roll your old retirement plan into an IRA, or Individual Retirement Account. With an IRA, you have almost unlimited investment options. You have control over whom you choose to work with. I help many of my clients with their IRA’s. I get to know their unique situation and provide them advice on how to achieve their long term goals, while monitoring the situation and helping them adjust life goes on. A 1-800 number can’t provide that service, nor can a do-it-yourself website. A rollover may not be appropriate if you’re retiring after age 55 but before 59 ½. An IRA may be more or less expensive than your old 401k, so make sure you do your due diligence before making any changes.
There is no one right answer for everyone when it comes to their old 401k. For some it may be to leave it where it is, while other may benefit from rolling that money over to their new 401k or into an IRA. Just don’t forget about it!
Please be sure to speak to your financial professional to carefully consider the differences between your company’s retirement account and an investment in an IRA. These factors include, but are not limited to changes to availability of funds, withdrawals, fund expenses and fees.
Securities offered through Cambridge Investment Research Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Products sold are NOT FDIC insured, have no bank guarantee and may lose value. Cambridge, FSB Wealth Management, and Farmers State Bank are not affiliated.