OCEAN CITY — When you change jobs, you have plenty to manage: the physical move, the new boss, altered assignments and responsibilities. The last thing you’re likely to think about is the money left in your previous employer’s 401(k) plan.
In fact, according to research firm Cerulli Associates, more than one-third of all 401(k) balances, including those of retirees, currently lie dormant, with no further contributions being made. Given that the average employee changes jobs every four or five years, it’s not uncommon for her to have amassed multiple retirement savings accounts, which she may not be revisiting on a regular basis.
"You should make sure your asset allocation in these accounts isn’t completely out of line with where you stand now in terms of your stage of life, your degree of wealth and your goals," says Bill Hunter, director of Personal Retirement Solutions at Merrill Lynch Bank of America.
One option is to consolidate all your old accounts in one place, which may allow you to look at your assets holistically. For example, a portfolio focusing too heavily on sectors that never fully recovered from the 2008–2009 financial crisis could be sacrificing real growth potential in today’s environment.
The assets in these accounts aren’t necessarily in danger. So if you do have multiple retirement savings plans with previous employers, what you choose to do with them will depend on a variety of factors — including your satisfaction with the investment choices offered by your older plans. Once you review your options, if you choose to roll over the assets from one account to another, there will likely be necessary paperwork and other logistics, which your financial advisor can help with. Here are some options, and the pros and cons, to consider:
1. Transfer to a traditional IRA. One simple solution is to move your old assets into an IRA, which keeps them growing tax-deferred. IRA accounts typically have a broader selection of investment options to choose from than 401(k)s, and you may have better access to investment advice. Make sure to do a direct rollover, Hunter says, so you don’t have to take possession of the assets before they go into the new IRA account. You have only 60 days to complete the move. If you exceed the deadline, you will get hit with income tax and a stiff early withdrawal additional tax (if you’re not yet 59 ½).
2. Transfer to a Roth IRA. A Roth is built with after-tax contributions, but investments grow tax-deferred until retirement, and your withdrawals (so long as you wait until you reach 59½) are tax-free. If you think your taxes will be higher after you retire, it’s a good reason to consider a Roth, Hunter says. A Roth IRA may also offer more flexibility in naming beneficiaries other than your spouse. But to achieve those benefits, you will owe income tax today on the total amount that you transfer from a tax-deferred IRA into a Roth. "We typically recommend that you pay those taxes out of a different pool of money so you don’t reduce the principal," Hunter notes. So you’ll want to factor in whether you have cash available to pay that tax bill.
3. Roll over your old accounts into your new 401(k). By adding the assets in your old retirement savings accounts to a plan at your new job, you get the benefit of consolidation. "You have all your retirement savings top of mind, so you can watch performance and allocation to make sure it’s not misaligned," says Hunter, adding that this does preserve those broader protections from creditor claims that a 401(k) provides. Also, assuming your plan allows it, you may borrow against your 401(k) assets if you need liquidity, which is not an option with an IRA. But Hunter cautions that taking a loan from your retirement assets should be considered a last resort. "There is a significant potential loss because the assets you borrow are not growing while the loan is in place," he says.
4. Keep your old employer’s plan. You could, of course, choose to keep your old retirement savings plans where they are, and just monitor your asset allocation in your different accounts separately.
5. Take a lump sum distribution. Receiving all your 401(k) assets now as a lump sum payment is, indeed, one of your possibilities — but consider it only in a financial emergency, Hunter says. "Sadly, a lot of young folks take that option because they don’t fully appreciate the ramifications of taking it out and losing the power of compounding investment growth." According to consulting firm Aon Hewitt, 42% of workers who lost their jobs in 2010 cashed out their 401(k) plans, with younger workers and those with smaller balances most likely to take that path.
Your financial advisor can help you review the options and decide which is best for you. But whether you decide to roll over your 401(k)s or leave them where they are, make sure your decision is a conscious one, and that it fits in with your overall wealth strategy.
(The writer is a senior financial advisor and can be reached at 410-213-8520.)