To Be Or Not To Be In One 401(k)?
Have you worked for a company in the past that has offered a retirement plan of some sort? A 401k, 403b, SIMPLE IRA, SEP IRA, etc?
Have you ever wondered whether or not you should consolidate the old accounts into your new plan or just move them all into your own IRA?
I get this question fairly often by employees working for a company: Should I have just one retirement account? If so, how do I combine them all?
A study was conducted by the Buerau of Labor Statistics between 1978 and 2012 that tracked the average number of jobs held between 18 and 48 years old. Their finding was that during the 30 year study, the average job count over that time period was 11.5 jobs . Some of those companies might have offered retirement benefits, which means those folks probably contributed to one or more 401(k) plans.
That’s a great thing! The average account balance in a 401(k) plan at the end of 2017 was roughly $104,300 which is up from $77,600 in 2012 . And with a median retirement of 18 years , you’re going to need every dollar of that hard earned money!
So, maybe you have multiple 401k accounts that are scattered between the various companies you’ve had in the past and in theory, they should all be working towards your goal of a comfortable retirement.
As an employee you may be thinking, “I’m glad I have all of these accounts separated. That means I’m diversified and I have a better chance of reducing how much I might lose in the event of a stock market correction,”. Although this may seem like a great way to take some risk off the table, a lot of times folks don’t realize that they’re still invested in the stock market and being split up in a few retirement plans might not change their risk exposure. If you’re in a “Large Cap” fund in plan A and are also in a “Large Cap” fund in plan B, you may have very similar performing funds which isn’t necessarily going to limit your losses between your accounts.
Another thing to consider is whether or not you’re looking at your accounts regularly. Frequently, I encounter the “I haven’t looked at it in a while,” or “I think it’s with ______(enter big name company here)” and I always feel uneasy when I hear those things because it shows that they’re not really taking their money seriously. Think about it for a second… I’m assuming everyone out there drives a car. Do you periodically get an oil change? Car wash? New tires? New belts? Breaks? Of course you do, otherwise your car would stop working and you’d be SOL! Knowing that you’re taking care of your investments (car), may help to extend its life and you should treat your retirement accounts the exact same way – Pay attention to them, check in with them, nurture them like a mama lion protecting her cub because at the end of your working years, it could mean the difference between being ready for retirement or not!
Something else I wanted to touch on are the fees associated with the accounts you may have. Yes, you as employee are paying in some way for your 401k/403b/retirement account. Believe it or not, 37% of Americans think that investing in their company 401k is free, and 36% of Americans either don’t know what their fees are or where to find them .
The difference between fees of 1.5%, 1.0% and .5% % might not seem like a lot, but over time that could cost you thousands and thousands of dollars. To give you a hypothetical example:
Okay, so now you’ve gotten all your account logins together and you’ve reset your passwords a few times (I’m totally guilty of this too). You notice you have 3 accounts open and you want to combine them all into one. Can you do that?
Once you’re done at your old job (whether than means you quit, got fired or laid off), you’re no longer eligible to contribute or transfer anything to their retirement plan. Your account will still be there - but you’re not allowed to put more money into it. So, what do you do?
If your new employer offers a retirement plan, usually you’re allowed to rollover your previous 401k accounts into your new company plan (the new provider will help you with the transfers). This could result in a higher account balance, that’s in one place, with one fee and a more focused investment strategy.
Now let’s say that your new company offers a plan you don’t want to contribute to or doesn’t offer a retirement plan at all. You might consider moving all of your money into an Individual Retirement Account (IRA). The benefit? You control everything in the account, including where the account is located. You pick whatever stocks, funds, etc. that you want which could give you more flexibility in how and what you invest in. Again, having all of your money in one account might reduce the costs and headaches as you’d have one login page. There are a number of companies out there that will help you open up and transfer 401k balances from your past jobs into a new or existing IRA. And for an extra charge you might be able to get more tailored advice in how to approach your investments.
Roth IRAs are funded with after-tax dollars, so normally you’re unable to rollover money into one of those accounts from your company 401k. Sometimes however, your employer will have a Roth 401k option in their plan (which can be a great benefit to the employees), so best check with them in case you were wondering it is offered.
You should always weigh the pros and cons before moving your money around. As a general guideline, I would suggest looking for 3 things to help you make your decision of whether or not you want to consolidate:
- What are the total fees you’re paying in all of your accounts?
- Does it make more sense to have your accounts in one place like your current company plan?
- How much control do you want over your investments.
As an employee, if at anytime you’re wondering about these things and want someone to talk to, you can ask your employer, your plan/financial advisor or myself. I’m happy to give general guidance for your situation. If you’re an employer and want your workforce to be more involved with the plan you currently offer, host employee education meetings and get them fired up on their benefits! You’d be surprised at how far caring for your employees will take you and your business.