Roll Over (k)-thoven

By Scott Lummer
Chief Investment Officer, mPower

Surprised you, didn't I? You probably thought I'd choose a title with an Olympic twist, since that's what everyone's talking about these days, and instead I paid homage to rock 'n roll great Chuck Berry. Why? To be honest, I have been so engrossed in watching the Olympics — particularly synchronized javelin throwing — that I haven't had much time to be creative. But I promised my editor that I'd make several gratuitous Olympic references in the column.

As you might guess from the title, this week's column explores whether there is a 401(k) afterlife — after leaving your employer, that is. Here's the question I received from a reader:

Technical Terms IRA Management fee Mutual fund

I recently changed jobs and was considering leaving my 401(k) intact with my old employer. Assuming that my old employer's plan has a sufficient number of investment alternatives to accommodate a variety of strategies, would there be any reason to roll the account into my new employer's plan? I expect to retire within 10 years, and the amount involved is in the six-figure range.

First of all, I want to point out that you actually have three options (hmm, the same as the number of Olympic medals for each event). They are:

1. Leave the money in the old plan,
2. Roll the money into your new employer's plan, or
3. Put the money into a rollover IRA

The third option means you need to select a mutual fund company, broker-dealer, or other financial institution to set up the plan for you.

There is a fourth option, taking cash, but I won't include it on the list because it is definitely not a medal-winning strategy. You open yourself up to losing money through taxes, penalties and lost investment opportunity, all of which should be banned substances (another Olympic term).

Depending on the respective plans and your goals, any of these options might work well for you. There are five factors (wow, the same as the number of rings on the Olympic flag) that might sway you in making your decision — expenses, investment options, features, flexibility, and convenience. Let's analyze each one.

Expenses

You should look at the fees charged by both plans. All other things being equal, you want to choose a plan with lower fees. In general, larger plans tend to have lower administrative and money management expenses (or management fees than smaller ones; so if your former employer is a larger company than your current employer, you might find that your former plan is better from this point of view. If your new employer is larger, you might prefer to move the money into your new plan. If neither company is very large (that was my situation when I joined my current employer three years ago), you might be better off rolling your money into a rollover IRA.

Remember, unlike in Olympic weight lifting, size isn't the determining factor here — you should start your research by finding out from your human resources office or the plan administrators what fees are charged to the different plans.

Investment Options

Some plans have a great selection of investment options. Unfortunately, many do not. For example, my previous employer had very poorly performing and expensive investment choices (it was the Jamaican bobsled team of 401(k) plans). I knew when I left that I would roll the money over into either my current employer's 401(k) plan or an IRA.

If you decide to put your money into a rollover IRA, you get to choose the provider. This means that you are virtually guaranteed a good selection of investment options with a rollover IRA, as long as you do your homework when choosing a provider.

However, some of the very largest companies have separate accounts that use institutional-quality private managers that may not be accessible through mutual funds. In those cases, the 401(k) plan of the current or previous employer may be preferred to a rollover IRA.

Features

Some 401(k) plans have very cool features, such as automatic rebalancing, great education, investment advice, and even a full-length bodysuit that improves your swimming time. If those features are valuable to you, they may sway your decision.

Flexibility

In general, 401(k) plans are more flexible because they allow you to borrow against the plan. Of course, I don't think this is a good idea (you can read why in my previous column, Shakespeare in Debt, but the lack of borrowing ability might dissuade you from the rollover IRA. On the other hand, it is generally easier to withdraw money before age 59½ from an IRA than a 401(k) for a first-home purchase or higher education expenses, so that should also be factored into your decision.

Convenience

Who wants to have to keep track of several different 401(k) plans? Think of the paperwork! It's much easier to have all of your money in one or two accounts, so it's more convenient to roll your money into either the current employer's plan or an IRA. Also, depending on what kind of terms you are on with your former employer, it may be more convenient not to maintain a connection.

Closing Ceremony

There is no hard-and-fast rule about whether to leave your 401(k) with your old employer or roll it over when you change employers. For many people, it makes sense to do a rollover — either into the current employer's plan or into an IRA. However, there are always exceptions, such as if your former employer has a great plan with a good selection of excellent-performing, low-expense funds, and several helpful extra features.

Related Reading Rollovers Stay in Your Protective Shell Shakespeare in Debt

By the way, if you decide to do a rollover, there are advantages to having your employer transfer the money directly into the new account rather than making out a check to you, which you then deposit. See our article on rollovers for more information.

Now, if you'll excuse me, I have to go watch the Olympic gymnasts roll over — I promised I'd tell Tchaikovsky the news. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Roll Over (k)-thoven

By Scott Lummer
Chief Investment Officer, mPower

Surprised you, didn't I? You probably thought I'd choose a title with an Olympic twist, since that's what everyone's talking about these days, and instead I paid homage to rock 'n roll great Chuck Berry. Why? To be honest, I have been so engrossed in watching the Olympics — particularly synchronized javelin throwing — that I haven't had much time to be creative. But I promised my editor that I'd make several gratuitous Olympic references in the column.

As you might guess from the title, this week's column explores whether there is a 401(k) afterlife — after leaving your employer, that is. Here's the question I received from a reader:

Technical Terms IRA Management fee Mutual fund

I recently changed jobs and was considering leaving my 401(k) intact with my old employer. Assuming that my old employer's plan has a sufficient number of investment alternatives to accommodate a variety of strategies, would there be any reason to roll the account into my new employer's plan? I expect to retire within 10 years, and the amount involved is in the six-figure range.

First of all, I want to point out that you actually have three options (hmm, the same as the number of Olympic medals for each event). They are:

1. Leave the money in the old plan,
2. Roll the money into your new employer's plan, or
3. Put the money into a rollover IRA

The third option means you need to select a mutual fund company, broker-dealer, or other financial institution to set up the plan for you.

There is a fourth option, taking cash, but I won't include it on the list because it is definitely not a medal-winning strategy. You open yourself up to losing money through taxes, penalties and lost investment opportunity, all of which should be banned substances (another Olympic term).

Depending on the respective plans and your goals, any of these options might work well for you. There are five factors (wow, the same as the number of rings on the Olympic flag) that might sway you in making your decision — expenses, investment options, features, flexibility, and convenience. Let's analyze each one.

Expenses

You should look at the fees charged by both plans. All other things being equal, you want to choose a plan with lower fees. In general, larger plans tend to have lower administrative and money management expenses (or management fees than smaller ones; so if your former employer is a larger company than your current employer, you might find that your former plan is better from this point of view. If your new employer is larger, you might prefer to move the money into your new plan. If neither company is very large (that was my situation when I joined my current employer three years ago), you might be better off rolling your money into a rollover IRA.

Remember, unlike in Olympic weight lifting, size isn't the determining factor here — you should start your research by finding out from your human resources office or the plan administrators what fees are charged to the different plans.

Investment Options

Some plans have a great selection of investment options. Unfortunately, many do not. For example, my previous employer had very poorly performing and expensive investment choices (it was the Jamaican bobsled team of 401(k) plans). I knew when I left that I would roll the money over into either my current employer's 401(k) plan or an IRA.

If you decide to put your money into a rollover IRA, you get to choose the provider. This means that you are virtually guaranteed a good selection of investment options with a rollover IRA, as long as you do your homework when choosing a provider.

However, some of the very largest companies have separate accounts that use institutional-quality private managers that may not be accessible through mutual funds. In those cases, the 401(k) plan of the current or previous employer may be preferred to a rollover IRA.

Features

Some 401(k) plans have very cool features, such as automatic rebalancing, great education, investment advice, and even a full-length bodysuit that improves your swimming time. If those features are valuable to you, they may sway your decision.

Flexibility

In general, 401(k) plans are more flexible because they allow you to borrow against the plan. Of course, I don't think this is a good idea (you can read why in my previous column, Shakespeare in Debt, but the lack of borrowing ability might dissuade you from the rollover IRA. On the other hand, it is generally easier to withdraw money before age 59½ from an IRA than a 401(k) for a first-home purchase or higher education expenses, so that should also be factored into your decision.

Convenience

Who wants to have to keep track of several different 401(k) plans? Think of the paperwork! It's much easier to have all of your money in one or two accounts, so it's more convenient to roll your money into either the current employer's plan or an IRA. Also, depending on what kind of terms you are on with your former employer, it may be more convenient not to maintain a connection.

Closing Ceremony

There is no hard-and-fast rule about whether to leave your 401(k) with your old employer or roll it over when you change employers. For many people, it makes sense to do a rollover — either into the current employer's plan or into an IRA. However, there are always exceptions, such as if your former employer has a great plan with a good selection of excellent-performing, low-expense funds, and several helpful extra features.

Related Reading Rollovers Stay in Your Protective Shell Shakespeare in Debt

By the way, if you decide to do a rollover, there are advantages to having your employer transfer the money directly into the new account rather than making out a check to you, which you then deposit. See our article on rollovers for more information.

Now, if you'll excuse me, I have to go watch the Olympic gymnasts roll over — I promised I'd tell Tchaikovsky the news. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.