If you left a 401(k) with a former employer, now might be a good time to reconsider moving it.
The best reason to roll your 401(k) out of your former employer's plan is convenience, says Spencer Williams, who is the CEO of RSI, a Charlotte, N.C., firm that manages retirement account transfers for corporations. It's a lot harder to pay close attention to multiple accounts than it is to keep an eye on one. Retirement planning is difficult enough without multiplying the factors.
The second reason to move a small 401(k) is the temptation to cash it out. Williams says that typical employee saves somewhere in the neighborhood of $3,500 a year in his 401(k), so it takes him about six years to reach the point where he has $20,000 in savings. Accumulating $20,000 is something of a watershed. Industry data suggests that employees with $20,000 in their 401(k)s are unlikely to take the money out and spend it, Williams says, but employees with less than $20,000 are very likely to cash out.
In this economy, where people are changing jobs with increasing frequency, there's a growing likelihood that workers will never hit $20,000 in savings because every time they move, they cash out. If you see yourself in this scenario, then it behooves you to tell your personnel office to rollover that 401(k) promptly -- before you are tempted.
Another reason to take the money and run is to escape having your savings tied up in your former employer's stock. The Employee Benefits Research Institute reported recently that nearly 15 percent of employees have more than half of their 401(k)s invested in the stock of the company where they work, and 7 percent of employees have more than 80 percent of their savings in their employer’s stock. Williams says that fewer employers are making investing in company stock an obligation because of the number of lawsuits over this issue. But if your former employer hasn't gotten the message, it's particularly important to extract your money and put it elsewhere.
The choices are between your new employer's 401(k) plan and an IRA. In making that decision, take a hard look at the fees charged by your current employer's plan. An employee who invests $25,000 at 7 percent and pays 1.5 percent in fees will have $64,000 less after 35 years than he would if the fees had been only 0.5 percent, according to a U.S. Department of Labor analysis.
Investment choices are another consideration. Moving your money to an IRA gives you more flexibility to invest the way you want. If your current employer doesn't offer many options, balancing your savings by putting some of it in an IRA could be wise.
If you decided to rollover your 401(k), Bankrate's Dr. Don Taylor offers some excellent advice on how to make the move seamlessly and even profitably.