4Q2017 | All ages
What Do I Do With My Old Retirement Account?
I recently changed jobs where I had a company retirement plan and I also have other retirement accounts at previous companies I have worked for. While I am excited to start my new venture – to build relationships, and have new experiences, I do wonder what I should be doing with those retirement plan accounts. What are my options?
It’s exciting to see how much is in my retirement account. Like many other Americans, it is the largest amount of money I have saved, and I want to conserve as much of it as possible. If you find yourself in a similar situation where you have an old retirement account, consider the following:
Key factors before making a decision:
A. Retirement Plan Expenses
Look for reasonable expenses across the board and take into consideration performance accounts for the investment expense. In addition, in some situations there might be additional administrative account expenses.
B. Investment Options Available
It is also important to know your investing appropriately and have a diversified portfolio. Keeping diversification in mind, you need to determine what type of investor you might be: are you looking for assistance in building your portfolios, or do you want to build your own portfolios?
Keeping all of your retirement money in one account can be enticing for many account holders in case any account updates need to be made. If a portfolio needs to be rebalanced, or beneficiaries need updating, it will be very simple to just login to one website, call one organization, or fill out one form.
You also want to make sure you can continue to build your nest egg and save for retirement moving forward.
Taking these key factors into consideration, you will now have a better perspective of what to do with your old retirement account and can look at the following options:
1. Leave it with your previous employer’s plan:
A. When reviewing this option, look at expenses currently charged in the plan. Most employers will send out an annual fee summary, or make it available on the provider’s website for you to see what fees are being charged in the plan. If not, feel free to ask your employer, so you can compare the cost based on your other account options. In employer sponsored retirement plans, there might be similar investment options that are also found in IRA’s, but potentially cheaper funds options in the employer’s retirement plan depending on which investment share class is available.
B. Each employer’s retirement plan has different investment options, and typically have a limited number of investment options. This is by design to not overwhelm participants in the plan. Many retirement plans provide simple investment solutions like the Target Date Funds (TDFs), which are already a diversified investment option. You have the ability to choose a TDFs based on your expected retirement year. For example, if your goal is to retire in 20 years, you have the ability to choose the fund closes to the year 2037 (2017 + 20 years). You can choose a 2035 TDF option, or 2040 TDF option, if one or both are available. This is a great option for those who like assistance choosing their investment options. TDFs are not the only options in an employer’s retirement plan. For a more hands-on investor, you typically can find other fund options in the plan, and in some rare occasions, there might be a brokerage account offered inside the plan. A brokerage account inside a retirement plan gives you a little more flexibility and provides you access to index funds, individual stocks, individual bonds, CDs, etc… This is a rare option as it can be costly inside an employer’s retirement plan.
C. By leaving money in a previous employer’s plan, you can no longer contribute money into this plan. Retirement contributions can only be made through payroll deductions and any additional ongoing savings will need to be done outside the plan.
2. Rollover to new employer’s plan:
A. Similar to the first option, you will be able to compare plan cost and investment charges within the retirement plan based on the fee summary provided by your new employer. Fees in your new employer’s plan will also depend on the size of the plan. Generally, if there are more participants in a retirement plan, there will be a higher amount of assets in the plan, which means lower expenses.
B. You might find your new employer’s plan will have similar investment options to your old employer’s retirement plan. If the options are similar, it will make sense to look at the performance of both sets of available investment options.
C. For those looking for a simple solution to keep all their money together, they like this approach. Again, when it comes to making beneficiary changes, investment changes, or just want to keep up with your account, there is only one plan to keep up with. In addition, you can continue to make ongoing contributions to your new employer’s retirement plan through payroll deductions.
3. Rollover to an Individual Retirement Account (IRA)
A. The cost within an IRA will differ from a retirement plan. There might be an annual account service fee charged, which can depend on the amount of assets you have in the IRA. In addition, depending on the type of IRA account you open, you might have stock or option charges based on each time you make a trade inside your IRA account. An IRA will also have different share classes available which potentially can be more expensive in comparison to an employer’s retirement plan.
B. The biggest benefit to an IRA is you will have more investment options available like individual securities; such as stocks, bonds, certificate of deposits (CDs), ETFs, mutual funds, and potentially others. This is an option for a savvy investor who prefers to build their own portfolio, actively rebalance their portfolio regularly, and have ultimate investment flexibility.
C. By putting all your money in an IRA, you will also have the ability to make contributions. Since an IRA is not tied to your employer, you will have to setup a method of contributing, taking into consideration your employers’ payroll system and IRA contribution options.
4. Withdrawal the Funds
A. Although this is an option given, this is not a realistic one. The hope is to leave your money in a retirement account, and when you get to retirement age, use a portion of it year after year to pay monthly expenses when you are no longer working. By taking money out of the retirement account early, there is a potential tax consequence (please see your tax advisor for more information), depending on your age you may incur an early withdrawal penalty, and it defeats the original purpose for saving this money.
So what options make the most sense?
There is no one solution approach for everyone and we all have different needs with different circumstances. If you’re looking to lower expenses and like convenience, keeping your money in an employer sponsored retirement plan like a 401(k) account might be the best option for you. If you’re looking for a hands-on investment approach with many investment options, an IRA will be the best approach for you.
As far as my decision is concerned I am looking at the key factors discussed. Coming from a very large employer where expenses were very low in comparison to most plans, performance was good, and familiar with my previous employer’s retirement plan provider, I plan to leave my account with my old employer. Though I am also looking to continue to save more for retirement and will start a new retirement plan while I am at my new employer.
Multicultural Education Specialist
Advisory services offered through Prime Capital Investment Advisors, LLC. (“PCIA”), a Registered Investment Adviser. PCIA: 6201 College Blvd., 7th Floor, Overland Park, KS 66211. PCIA doing business as Qualified Plan Advisors (“QPA”).
This commentary is provided for information purposes only and does not pertain to any security product or service and is not an offer or solicitation of an offer to buy or sell any product or service.