Whether you're leaving your job because of coronavirus-related layoffs or because you've found a new position, there are a lot of decisions you have to make when you're moving on. And one of the most important is what to do with your 401(k).
Typically, you have a few different choices about how to handle this retirement account. One option would be to leave it with your current employer, but another is to roll it over into your new employer's plan or into an IRA at a brokerage firm of your choosing. For many people, this option is actually the best for three key reasons.
1. You reduce the risk of forgetting about the account
It may seem hard to believe you'd just forget about a 401(k). But with people changing jobs around once every 4.2 years, according to the Bureau of Labor Statistics, you may end up with lots of accounts with different employers. Over a long career, it's easier than you'd imagine to lose track of some of them.
And the data shows this does happen with alarming frequency, as seniors 74 and over were found to have more than $38 million in unclaimed retirement accounts, including some valued at more than $13,000 each.
If you roll 401(k) funds over every time you switch jobs, you won't run the risk of losing track and missing out on using the money you worked so hard to save.
2. You can better manage diversification by keeping your accounts together
Diversifying your investments and maintaining an appropriate asset allocation are key steps to managing risk as an investor. Unfortunately, it's harder to see if you're accomplishing these goals when you have your retirement money invested all over the place.
If your money is all in one account, you can see at a glance what percentage of your portfolio is invested in stocks and if you've got exposure to a balanced mix of different kinds of investments including large caps, small caps, real estate, bonds, and emerging markets.
But if your investments are spread around different accounts, it's far too easy to end up with too much invested in a particular sector or too much or too little in stocks, unless you're regularly taking the time to check each account and tallying up the total values of each of your holdings across all of them.
3. You can access more investment options
Workplace 401(k) accounts often offer limited options for what to invest in. And sometimes, the investments available to you charge higher fees than you'd prefer.
If you roll over your 401(k) into an IRA, you won't have to worry about these limitations. You can put your money with a broker of your choosing that gives you access to a wide range of options so you aren't constrained when it comes to picking where to put your retirement funds.
Is rolling over your 401(k) right for you?
If you're happy with how your money is invested, you're confident you can keep tabs on all your old 401(k)s, and you'll remember to consider all your accounts when looking at your asset allocation, there's no harm in keeping your cash right where it is.
But for many people, the upsides of a rollover outweigh any downsides. If that's your situation, make sure you follow the proper process and act quickly to reinvest your money so you don't miss out on potential investment gains.