Is there any reason not to rollover a 401K from a company after you are no longer there?
- Location: Los Angeles, CA
- Amount in Savings: $400,000
- Household Income: $100,000-$300,000
- Source: Wimple 401K Calculator
Answers and Comments
Given your income range yes there maybe a reason not to roll. If you are over the income limit to make a Roth IRA contribution and have to other IRA assets you can still make a Roth IRA contribution using the "back-door" method. If you roll your 401k into an IRA you close this door.
You can roll your 401k from your former employer to your new employer and leave this back-door open. If your former employer had a very large 401k plan you may well be able to continue your invesstments there at a lower cost than might be available to you elsewhere.
Bottom line don't jump to the rollover before considering all your options.
A 401K that enjoys economy of scale in its investments and where the employer pays the administrative fees may offer you inexpensive access to very good funds, and maybe you appreciate the free advice? Other than that, probably not. Just be mindful of all the other pitfalls inherent in any financial decision.
I've advised 401k's and individuals for more than 30 years.
A 401k must be managed under the more stringent ERISA requirements. These ERISA protections do not apply to funds that are rolled over into a self directed IRA. In addition, many 401k's allow for loans against the participants balances. Those loan provisions are not provided in IRA's.
In addition, 401k's often qualify for less expensive institutional share classes that often have $1 million or $5 million investments. These Institutional Funds offer much lower expense ratios than the retail share classes of the same fund. Many companies also pay for the administrative fees of their accounts. Individuals who roll their funds into self directed IRA's may not have enough funds to qualify for these Institutional share classes.
In addition, a 401k is overseen by the plan Trustees of the 401k. These Trustees are required to monitor these investments in a Fiduciary capacity.
But the Plan Trustees often limit the fund options to a few dozen mutual funds. Individuals who roll their money into a self directed IRA can choose from tens of thousands of mutual funds, stocks, bonds, ETF's, closed end funds, options, commodities, real estate, CD's, Treasury Bills, and many more investments. Look closely at the fees and risk associated with investments in your Rollover IRA. Some of these additional choices may be better or worse. Closely compare your investment choices including all expenses and performance before deciding which approach is better.
In addition, if you have less than $5,000 in your company 401k, your employer may forceably cash you out of the plan in a taxable distribution if you do not contact your employer. You may not want a taxable dstribution, so be proactive with your former employer.
Many large employers are now offering in-service 401k rollovers while employees are still employed with them. Employers have been increasingly offered this option to reduce their fiduciary liability in light of all the recent lawsuits against employer 401k plans. See if your existing employer allows an in-service rollover. If you have further questions, please contact me through this site.
Short answer is no, not really. All the reasons listed above are correct. Things to keep in mind, not all 401Ks are created equally. Your old plan could have had crazy high investment expenses and the new 401K has really low expenses or it could be the other way around. Make sure to do your research on expenses. Are you managing it yourself or do you have an advisor? If you are doing it yourself, there are typically lots of tools to help you manage it and maybe even a plan advisor to help too. And what was mentioned before, ability to have loans on 401K could another reason to move to a new 401K.
If you are rolling it out to an IRA or don't have a new 401K to move it to, you will have more access to different type of assests and typically at lower investment expenses in an IRA than a typical 401K. But if you are managing it yourself, you may not have all the same tools at your access as you would in a typical 401K.
You have not given enough information. How old are you? How long until you plan to retire?
$400,000 may seem like a lot of money, but it is woefully short of what you will need for retirement. As a rough estimate you will need between $1.5 million to $7 million depending on your income ($100,000 to $300,000). With life expectancy increasing and medical costs and transportation increasing old estimates of ten times earnings are too low.
It comes down to your age and how many years you have to accumulate the wealth you need to retire. You accumulate wealth from savings and from growth in your 401(k) or IRA. The more you save, the less growth you need; conversely the less you can save the greater the growth you need.
I would recommend you discuss this decision with at least three human financial advisors and at least one robo-advisor, preferably one like Vangurad or Betterment. . You can lay our your personal situation and get recommendations from each. If there is not much difference ni the approach from human financial advisors and the robo-advisor, I woul recommend the robo-advisor. The fees are significantly less and a difference of 0.75% over 20 years will mean an additional increase in your portfolio of 10% or more.
Check websites of human financial advisors to look for those who are different in their approach.
As you can see, this is not a simple question, and nothing of this magnitude sould be decided in a vacuum. All the parts of your financial plan should flow together. Unfortunately, no one is an expert in all parts of financial plans, so you would be best advised to work with several information sources, learn for yourself, and then perhaps work with two or three advisors in different disciplines to hear many opinions on the different options, so you can make an informed decision. I find that many traditional financial advisors neither like life insurance, nor have expertise in life insurance, yet life insurance can be an important part of the whole package. And life insurance advisors, like me, are not good sources of information on handling traditional retirement accounts. That is one of the reasons I wrote "How to Not F$$k Up Your Financial Future, and the Rest of Your Life" (available on Amazon.) Several sections in it deal with how to evaluate financial advisors and insurance agents. Perhaps start there, or reach out to me at [email protected] And while free advice on sites like this may help point you in the right direction, when you are ready to make a decision, you may find that free advice ends up being more expensive than paid advice from the right people.
You may find that an investment advisor is able to provide you with a diversified portfolio that will give you a stable and consistent income in retirement. This may be a better allocation than you can achieve in the 401k. Our research shows that most k plans do not have adequate diversification in the most important asset classes. Your plan may be different, but I would suggest you have an investment professional do the analysis and tell you. It is always a good idea to evaluate your choices once you are ready to retire.
Many great answers have already come your way. All good advice to make sure you make an informed decision before you make an irrevocable decision. One more point ... in my 30 plus years of practice as a Certified Financial Planner® ... I am usually asked the question you are asking when a plan participant moves to a new company but has not yet been allowed to participate in the new plan.
Your question was "Is there any reason not to rollover a 401K from a company after you are no longer there?"
So the multi-part answer is ... if you can rollover … and you are not interested in paying extra taxes this year to convert your past contribution to a Roth ... and your new 401k plan has a better choice of investment options with better internal (and other) fees that you like ... and you are planning on staying with your new company for several (many) years ... do consider making the transfer. When you are no longer with a company since you would be a "former" employee ... I have found that HR departments are not as easy to work with or give you the attention you might need. And if the old company should disappear … then working with a “receiver” to transfer assets out of a plan can take a month or more. I am so glad you are doing your due diligence to get the best answers so you can curate the answer(s) that work best for you.