When I Changed Jobs, I Chose Not to Roll Over My 401(k). Here's Why
KEY POINTS
- Not all 401(k) plans are created equal; there is a large disparity between how plans are managed and structured.
- Despite the allure of consolidating accounts, I ultimately decided to keep my old plan because it had lower fees, better investment choices, and greater plan flexibility.
Changing jobs is a time of transition not just from a professional standpoint, but also from a financial one. One question that inevitably comes up during this time is what to do with your 401(k) plan from your former employer. For many, rolling it over into a new account seems like the obvious choice -- but it's not always the best move. In fact, when I changed jobs, I made the decision not to roll over my 401(k). Here's why.
Not all 401(k) plans are created equal
Because 401(k) plans are optional, there is a large disparity between how plans are managed and structured. Some employers offer better plans than others, and some don't offer plans at all. That means there is a huge gap between the best- and worst-run 401(k) plans.
Some companies are content to offer a bare-bones plan that never changes, while others devote substantial attention, time, and resources to make their 401(k) plan excellent.
Fortunately, 401(k) plans are better today than they were in the past. In recent years, there has been an increase in the number of investment options typically offered under 401(k) plans as well as the level and types available. When looking at a plan, here are key features you want to consider.
Fees
One of the biggest factors to consider when evaluating a 401(k) plan is the fees that are associated with it. Many plans charge high fees that eat into your returns over time.
These can include administrative fees, management fees, and expense ratios. Before you decide to roll over your plan, make sure you understand the fees associated with both your old and new plans.
Low-cost 401(k) plans offer investors the opportunity to reduce their expenses and increase their potential earnings. By keeping expenses low, you can save more money over the long term, making a significant difference in your retirement balance.
I decided to keep my 401(k) account open to continue taking advantage of the low-cost investments it provided. Plus, the account closing costs were high, so the cost of moving money between accounts would have been even higher.
Investment options
Another factor that influenced my decision was the investment options available in my old 401(k). If your old employer offers a 401(k) plan with lots of investment options, keeping it in place can be a smart move.
Some 401(k) plans offered by banks or brokerage firms offer limited investment choices. In my case, my previous employer's 401(k) had a wide variety of index funds, target-date funds, and low-cost ETFs that met my investment needs.
The new 401(k) plan only offered actively-managed mutual funds with costly expense ratios. Unfortunately, many of these funds underperformed the market. So keeping it in place meant avoiding a reduction in my portfolio choices.
Plan flexibility
Another factor to consider is the flexibility of the plan. Some plans may allow for more flexible options, while others may have stricter guidelines. If you think you may need to access your savings before retirement, it's important to understand the withdrawal rules of both plans.
My previous plan offered borrowing options and hardship withdrawals for specific difficulties, such as medical expenses. These features were not available in my next employer's plan, so this is another reason I decided to stick with my old 401(k). Although I have no intention of accessing the funds early, having the option provides vital flexibility.
In addition, many 401(k) plans offer financial tools, personalized advice, and even a robo-advisor feature. If your new one doesn't offer these benefits, it may make sense to stay with your old one so you can continue to take advantage of the services.
Deciding whether to roll over your 401(k) plan can seem daunting, but it's an important decision that can impact your financial future. Before making a decision, be sure to consider the fees, investment options, employer match, flexibility, and overall performance of both plans. By doing your due diligence, you can make an informed decision that aligns with your investment goals and helps you build a secure financial future.
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