The cost of a forgotten 401(k) is more than you might think.
Leaving your old retirement plan at your former job might seem like a minor oversight. But in reality, it can cost you thousands of dollars over your working career. This is why more people are considering a 401(k) rollover.
You might want more investment options, or you might be paying too much in administrative fees. Or you might just want a clean break from your old employer. Whatever the reason, it’s usually a smart idea to roll over your 401(k) to a provider of your choosing — or at least give the process some thought.
Here, we’ll discuss four reasons you might want to roll over your 401(k) today.
1. You’re not satisfied with your 401(k) investment options
In the grand majority of cases, you’ll need to have separated from your employer to be able to move out of your 401(k) plan. In the event that you have moved on to a new job, it’s worth looking at your former employer’s investment menu to see if it’s to your liking. Most 401(k) plans offer a list of mutual funds that cover certain segments of the stock market, if not the entire market.
While this might be fine for certain investors, you might want access to more bespoke investment options. These might include individual stocks, bonds, options, ETFs (exchange traded funds), and in certain cases, even cryptocurrency.
This is all to say that while your old 401(k) investments might work for you, they may not work for everyone. And if you’re someone who tends to trade more actively, you might want to roll your 401(k) to an IRA of your choosing.
2. Your 401(k) fees are too high
An especially expensive 401(k) plan is not only bad for your investments, it also can have the effect of adding years onto your working career. There are two main fee types to look out for when you review your company’s 401(k) plan document: administrative fees, as well as the underlying investment fees (also known as expense ratios) you pay when you invest through the plan.
Administrative fees might be charged on the assets you have in the plan, or they might be expressed as a flat fee. Still, these fees will vary from provider to provider and can have a meaningful effect on your long-run 401(k) balance. Investment expense ratios usually vary from 0% to 2%, with newer plans offering fees toward the more reasonable end of the spectrum. Fees in an IRA tend to be far lower, and they’re in your control — since you pick your investments in an IRA.
While 2% may not seem like much, an employee that contributes $250 per month to their 401(k) plan will end up with over $100,000 less at retirement than someone who utilized a low- or no-cost investment plan. Note that this assumes a zero starting balance, an 8% gross return, and a 30-year investment horizon.
3. You want to consolidate your finances
This is an underrated — albeit important — reason to roll over your retirement funds. The more financial institutions you deal with, the more tax forms, passwords, and customer service interfaces you’ll need to deal with. As you get older and your finances grow, having more providers to deal with can present itself as a major weakness as opposed to a strength.
Simplified financial management tends to give most investors a sense of control. In other words, having all your accounts housed with one or two providers allows you to seamlessly see things from a bird’s-eye view. While it may not sound all that important, you’ll be happy to have one less number to call if you need to access or rearrange your money.
4. You want a clean break from your former employer
Depending on the circumstances surrounding your departure, you might want to simply move on to new frontiers with your retirement money. The beauty of a 401(k) rollover is that you don’t need to give a reason as to why you want to move your account — you can just move your retirement funds at your discretion. If you’ve made that call internally, don’t be afraid to bring that chapter to an end in real life.
Roll over your 401(k) today
Remember that it’s key to get your retirement investments allocated and optimized as soon as you can. High fees and suboptimal investments can erode your money over time and consequently add years on to your working career.
To initiate a rollover to an IRA, first choose an IRA provider, and then contact your former employer’s 401(k) plan administrator. They’ll be able to assist you from there.
In the end, and no matter what you choose to do with your retirement money, be sure to give it some thought first.