Did you just leave your job? Or did you leave a job a loooong time ago, and just never did anything with that 401(k)?
It’s usually not urgent, to be sure, and there are plenty of other more-urgent things to think about when you leave your job. But in tech, where you might move from job to job every few years, you’re going to collect a lot of 401(k)s over the years.
It’s possible that doing nothing is the right choice, in addition to being the thing that you’ll do anyways. But if you haven’t thought it through, how would you know?
Let’s figure out what you should be doing with that old thing.
Your Options for Your Old 401(k)
When you do get around to dealing with an old 401(k), you have three choices.
- Keep your money in your old 401(k).
- Roll the money from your old 401(k) into your new 401(k).
- Roll the money from your old 401(k) into a Rollover IRA at a custodian like Vanguard or a roboadvisor like Betterment.
- Cash it all out and run for the border. Just kidding. There’s, like, a Giant Freaking Wall there, I hear.
There is no universal answer. The answer depends on, well, the specifics of your 401(k) and the rest of your finances.
How to Evaluate Each Option
#1: How good are the investments?
In an IRA, you have access to all the investments you could ever want. Good, bad, and ugly.
In a 401(k) plan, either your old one or new one, you have a limited list of investments. This isn’t necessarily a disadvantage! You don’t need many, if they’re good. And too many choices can lead to bad decisions.
“Good” investments are low cost and broadly diversified. Best for most people is a target-date retirement fund, which is a “set it and forget it” kind of investment. Outside of 401(k)s, low cost usually means an “annual expense ratio” of under 0.25%. A 401(k) has legitimate costs to operate, so I’m okay with, say, an ER of 0.40% or so (somewhat arbitrary there).
In my personal experience in tech, and my experience with my clients, if you work for one of the big tech employers, your 401(k) probably has good, even great, investments. Cheaper than you’d be able to get as an individual investor anywhere else, broadly diversified, and passively invested.
I’ve always attributed this to the fact that the companies have a lot of plan participants and a lot of money in the 401(k) plan—which means they have leverage. I’d like to think that these companies also have teams dedicated to running a good 401(k), but there’s plenty of evidence showing that professional investor types make boneheaded investment decisions all the time.
If you work for a smaller company, you’re more likely to get an “okay” 401(k) plan, possibly with an astoundingly bad web interface.
#2: What are the costs of the plan?
In an IRA, usually the only costs are those of the investments you hold in them. If your account is small enough or you insist on paper statements, some custodians will charge you an annual fee, say $50.
401(k) plans have costs to cover. Some of those get paid by investment expenses, some are charged separately to account holders. Again, the larger the 401(k) plan (if you work for Google, Amazon, IBM, etc.), the cheaper it usually is for individual participants, that is, you.
#3: How easy is it to access and make changes in your account?
Between my husband and me, when we were both in tech, we had some 401(k) providers that offered good customer service and intuitive, easy web interfaces. And some that, um…didn’t. And I’ve had clients with IRAs at really Old School firms whose web interfaces were confusing and limited.
Honestly, in this day and age, if you can’t easily access and manipulate your account via a modern, well-designed website, I suggest you move your money elsewhere.
(Personally, I don’t think having a good mobile interface is all that important. Apps are all about making it easier for you to f**k around with something frequently, while out and about, all casual like. That’s a Very Bad Idea when it comes to your investments.)
#4: What impact will your choice have on the simplicity of your finances? And how important is that to you?
The more accounts you have, the more complicated your finances become. If you’re in your 20s, 30s, or 40s in the tech industry, I think this “simplicity” consideration is going to be particularly relevant for you. You’re probably going to collect a lot of 401(k)s over your career.
My husband and I worked in tech for many years, honoring the ages-old tradition of changing jobs every few years. So, between us, we had a lot of “what do we do with our old 401(k)?” decisions to make. Here’s how we made the decision when my husband left Hewlett Packard, which he worked for back about 2 incarnations ago.
HP offered a great 401(k) plan:
- It was through Fidelity, so a modern, usable web interface. While at HP and after he left, he had access to the same good interface that allowed him to do everything he wanted.
- Great investment options. The funds were cheaper than we could find anywhere else (even the low-cost leader, Vanguard) and were broadly diversified and passively managed.
- The plan itself charged him an extremely small administrative fee every year.
When he left HP, however, we still chose to roll his HP 401(k) to his Vanguard IRA. Why? Because we prioritized simplicity of management—and the fact that we’d actually manage it if it were simple enough—over the slight cost advantage the HP plan provided. And I’m even a financial planner! I like this stuff!
If you leave your old 401(k) where it is, are you ever going to pay attention to it? If my current clients are any indication, the answer is, “Um, nope. I’m so embarrassed that I haven’t touched that in years. Oh, and I’ve got these other 2 old 401(k)s, too.”
The more old 401(k)s you have lying around, the more disjointed your finances are going to be, and the less likely you are to understand what the heck is going on in your investments, and therefore the less likely you are to actually Do What Needs Doing.
Making This Decision While Working with a Financial Planner
If you’re working with a financial planner when making this decision, I encourage you to understand the advisor’s incentives in making her recommendation. Specifically, how does your advisor’s compensation change based on what she’s recommending?
If your advisor gets paid a percentage of the money she manages for you—as the traditional fee-only advisor does—then there is a clear conflict of interest in making this decision. She can’t manage a 401(k), and so won’t get paid on that money if you leave it there. She can manage an IRA, and so will get paid if you move it.
A recommendation to move the money from the 401(k) to an IRA can still be the right one for you. It simply introduces uncertainty into why the recommendation was made. Every compensation model has conflicts of interest, there’s no avoiding them entirely. But this scenario represents one reason why I charge a flat fee that doesn’t change based on where you hold your money.
Benefits to Keeping Your Money in a 401(k)
Your answers to the four questions above may favor keeping your money in a 401(k) or moving it to an IRA, depending on the specifics of your situation.
But there are also some universal advantages that 401(k)s have over IRAs, and vice-versa, which you should at least read and nod knowingly at before making your decision.
- Money in your 401(k) is protected against creditors, that is, people can’t sue you or win a court case against you and take your 401(k) money, and you can keep it through bankruptcy. Protection for IRA money is neither complete nor universal.
- There are some savvy tax moves you can make while money is still in a 401(k). Moves that disappear once you move the money to an IRA:
- If you have company stock in your 401(k)—which generally I’m not a fan of, but still—you can take advantage of “Net Unrealized Appreciation” rules to get your company stock out of your 401(k) in a tax-savvy way.
- If you want to do Roth conversions of after-tax money in IRAs, you want all your pre-tax money in 401(k)s, not IRAs.
Why You Might Want to Roll an Old 401(k) into Your New 401(k)
All those advantages above are for money in any 401(k). There are a few additional advantages from your current 401(k), which might encourage you to roll your old one into your new one.
Before I start listing reasons you might want to do this, please find out if your new 401(k) even accepts outside money like this. Some don’t!
- Your current 401(k) plan might allow you to take loans. Not saying it’s a smart idea, but maybe you’ve got a compelling reason.
- As you get closer to retiring and then in retirement, there are a couple other advantages to keeping your money inside a 401(k) “wrapper”:
- If you leave your employer after age 55, you can actually take money out of the 401(k) without penalty (in an IRA, you have to wait until age 59 ½)
- If you’re over 70 and working, you won’t be forced to take Required Minimum Distributions from your current 401(k)
Benefits to Keeping Your Money in an IRA
As you move from job to job, you can roll your old 401(k) into a single Rollover IRA at a Vanguard or a Betterment. Having one account (instead of 5 old 401(k)s) makes it so much easier to understand and take care of your investments.
One place to change your beneficiary designation. One place to make investment changes. One place to change your mailing address. Etc.
Keep in mind, however, that you could get this same benefit of simplicity by continually rolling old 401(k)s into your new 401(k)! If your new 401(k) is good and accepts 401(k) rollovers, I’d be hard-pressed to tell you to use an IRA instead!
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.