Leaving your 401(k) with your old employer may seem like the easiest option, but the easiest option is rarely the best thing to do. Many employees don’t understand that they have other options available to them through a financial advisor who is a fiduciary. By putting some work in on the front end, you can get much better results for retirement – a time where managing money intentionally is especially crucial.
Why You Shouldn’t Leave Your 401(k) With Your Old Employer
Here are ten reasons we think you shouldn’t leave your 401(k) with your former employer:
1. Past performance doesn’t mean future success. Investing shouldn’t be a “set it and forget it” endeavor. Your 401(k) might have performed well the last few years, but what if the future of investing looks nothing like the past? This is especially relevant in our current climate. You can’t rely on what has performed well in the last decade to perform well in the next – and the next decade is when you’re really going to need that money.
2. Leaving your 401(k) with your old employer can seriously limit your investment success. Most 401(k) plans have a very limited number of investment choices. For example, when was the last time your plan offered a gold fund? Or an emerging markets fund? These two sectors look primed to perform well over the next few years, and most employer-offered plans do not provide access to them. Rolling your retirement plan into your own IRA gives you almost unlimited choices and total control. In addition, 401(k) plans do not offer strategies. Once rolled into your own IRA, you have a multitude of various investment strategies available to you. It also means you can protect your accounts from loss, which is vitally important during the retirement years. Those tools aren’t available within a 401(k) plan.
3. You need an overall cohesive plan, not disconnected tactics. If you have other investments, there’s a likelihood that you have most of your assets in just 1 or 2 “baskets.” For example, if you own index funds in your 401(k) and in your IRA, then you might have large exposure to a small number of stocks. Thinking you’re diversified when you’re not, can be painful in the next correction or bear market.
4. No one’s looking out for you. Those people on the phone are service people, not financial planners or stock pickers. They don’t know you or your family. They don’t know your goals or your unique challenges. They cannot provide good investment advice. You owe it to yourself to find someone who not only knows what they are doing, but has your best interests in mind when it comes to managing your hard-earned retirement funds.
5. It won’t give you a tax or distribution strategy, both of which are really important. If you’re retired and taking distributions, it would be helpful to have a strategy, not only for taxes, but for what funds should be liquidated first, etc. A quality advisor can not only clarify this but calculate federal and state tax withholding. An independent investment advisor will monitor your required distributions and change beneficiaries, if needed. If you pass away, you don’t want your ex getting your retirement plan. This is surprisingly common! And once you’re gone, it’s too late to fix this problem.
6. There’s always the chance your old employer could go belly up. Many 401(k) plans invest in company stock, and this can be a problem if the company gets into trouble. Just ask my client who worked at Enron. It never hurts to consider the unthinkable when it comes to your retirement money. Moving it away from your former employer adds another layer of protection.
7. Needs change over time, and so should your investments. Especially if you want to maximize retirement dollars. (And you should.) Life is unpredictable, and your retirement years are no different. Your funds should be invested appropriately, and you should have a trusted advisor who can help you readjust when curveballs (like the sudden loss of an income source) come along.
8. High fees could take away from what you need to live on. One of the sad secrets of the industry is that almost all fees associated with investing are hidden. So, you could be paying high fees and not even know it. You might lower your fees by leaving your money in the 401(k), but what are you getting in return? A quality advisor will disclose all fees, be cognizant of costs, and watch out for what’s in your best interest when it comes to managing your money. Read more about finding a quality advisor here.
9. Employers often change plans, but it’s not because it’s in YOUR best interest to do so. It often benefits them. I know employers who are on their fourth or fifth different 401(k) plan. Every time your employer switches plans, you not only have to review all the new options, but you’re probably still left wondering, “Is this the best plan for my retirement money?”
10. You might forget about it! I’m not kidding. I had a friend who passed away after experiencing dementia. He had online accounts so there was no paper trail of statements, etc. It took time and some legal wrangling to finally get access to his old 401(k) plan. At CSH all of our clients have use of a personal portal called The Vault, which can help avoid situations like this. Trusted family members (like executors and heirs) can also have access to the portal, so the transition is a lot easier.
The bottom line is having someone you can trust is important in times of need and stress. The transition to retirement is a time of high need and high stress. Next time you’re on hold or working your way through a customer service menu think about how much anxiety that may be adding to your life.
At CSH we believe everyone deserves a reliable financial partner they can trust – one who can provide trusted guidance for a secure and worry-free future. That’s why we work with people who may not even think they qualify to work with a financial planner. If you have at least $100k in your 401(k) account, then we may be able to help. Give us a call at 217-824-4211 for an introductory chat. We’ll get to know you and get some preliminary information from you, and then decide if moving forward is in your best interest.