Today’s question is on a topic for anyone who has changed jobs, and an especially important point for millennials as they continue in their careers and change employers
The question is:
“Should I rollover my old 401k?”
When you leave a job, you will usually have the option to either keep your savings in your old workplace 401k, roll it into your new company’s 401k, or roll it into an IRA. What is the best choice?
First of all, the term rollover simply means transferring your 401k into a traditional IRA. Because these accounts are treated very similarly by the tax code, there is often no tax consequences, or other fees associated with rolling over your old 401k into an IRA. But why do it at all?
The first thing we look at with clients contemplating a 401k rollover is the fund selection in their current 401k, specifically the expense ratios of the funds available to the 401k. You will be able to find this information online or through information provided to your employer.
Sometimes it is worth paying slightly higher fees for funds that offer unique exposures, such as emerging markets. However, if your old 401k’s only option to invest in a very common investment such as a broad based large cap stock index fund costs 1%, rolling your old 401k into an IRA could save you a lot of money over time. Infact, it is hardly unusual for us to find clients who are able to actually pay us to help manage their investments and create a financial plan for them solely in the reduction of fees in the funds available to their 401k and the options we have available.
Many investments today can be found with expense ratios below 0.1%, much lower than the options available to those with 401ks at smaller companies.
These small percentages might not sound like much, but it really adds up. On a $100,000 investment growing at 6% before fees, the difference in the final portfolio balance between a fund with a 1% fee and 0.1% fee is over $126,000!
There are other factors to consider as well. Many 401ks limit the number of transactions you can have in your 401k each year or month. For example, federal employees in the TSP are limited to a certain number of transactions per month. Other plans limit the number of withdrawals participants can have per year in retirement, which makes it much harder for a retiree to manage their finances in retirement.