What To Do With An Old Retirement Account
Do you have an old 401(k) (or other company retirement account) your former employer is telling you to do something with or that you feel is hanging out there aimlessly? You need to “take care of it” one way or another. This is 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, the holder of the old retirement plan, 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. But there’s hope! Let’s clear your path so you’ll know how to handle your old retirement account. - - - First, you don’t have to do anything with the old plan. You can leave it there if you’d like. Is that the best decision? It depends. The 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 retirement plans may provide you with 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 article, so get professional help if you own a lot of company stock (more than 5% of your net worth). Second, does your old plan 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 account, will it be subjected to new expenses and fees? As mentioned earlier, the financial advising sales force is always interested in folks moving old retirement assets so they can make a sale. *But that doesn’t mean leaving it is your best choice because…* Your old plan may be awful. Awful would be defined by three factors: high costs, poor investment selection, and shabby service/user interface. Let’s break that down.
How do you know if the costs of your plan are high? First, know what you’re looking for. The costs most commonly assessed are fund expenses (expressed as an expense ratio), advisory fees, and recordkeeping fees. Next, login into your plan 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*) on your keyboard 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 plan 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 naïve.
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 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 plan has shabby service or a complex user interface by answering this one question: is it difficult for you to access, get information on, or make changes to your account? If you’ve tried to work with your old account and you find any of that to be true, then you need to take action. If there is a high risk your old account will fall into your “out of sight, out of mind” mental category, neglect could have a high cost. Change happens in life and these assets may need adjustment. But you’ll never know if the old account is 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 the account, 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 retirement account. 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 are financial savvy and have some time to dedicate to the task, then you could do this yourself. However, many appreciate help, because they don’t have either the confidence, the time, the energy, or the focus to make the right choices with the account. Then by all means, enlist help from a financial professional. My only plea is this: know how you’re paying for the advice and know your alternative options. By going through these steps, you’ll gain the confidence your assets are helping you gain the flexibility in your life you crave.