New year, new job -- here’s what to do with your 401(k)
For employees who’ve recently started a new job, the issue of what to do with a 401(k) from a previous employer can be intimidating, but it doesn't have to be.
Job turnover is at a historic high, with 4.5 million Americans quitting their jobs in late 2021, according to ABC News. For employees who’ve recently started a new role, the question of what to do with your 401(k) from a previous employer can feel intimidating—but managing your retirement investments doesn’t need to be complicated.
Let’s break down what smart management of your retirement funds looks like, and what to do with that old 401(k) now that you’re in a new role.
The basics: managing your 401(k) like a pro
Most 401(k) plans have similar features, but they aren’t identical. Take the time to carefully compare your new employer’s plan with your previous employer’s plan. Consider the following:
- Which plan offers more unique investment options that may allow for greater diversification of your portfolio?
- How do the two plans’ fee structures compare?
- Do the plans offer other features, such as loan provisions or early withdrawals? How important are those features to you?
- What are the tax consequences related to the types of contributions into your old plan if you were to roll them into your new plan?
Whether you decide to keep your old plan or roll those funds into your new plan, at minimum I always recommend contributing to your 401(k) in the amount that your employer will match. This match is “free money” to you, which is a great benefit.
Beyond this minimum contribution, assess how much money you feel comfortable taking out of your monthly cash flow to put away for the long term. While it’s ideal to maximize your 401(k) contributions to the IRS limits every year, that may not leave you with realistic take-home pay. Don’t over-contribute to your 401(k) at the risk of putting expenses on credit cards or incurring debts—but if you find that you have a reasonable discretionary income at the end of each month, consider allocating a higher percentage to your 401(k). And make sure to regularly increase your contribution as you receive raises and/or bonuses.
When to keep your old 401(k)
In some cases, it may be wise to keep a 401(k) from a previous employer active; rather, than rolling those funds into your new employer’s 401(k) program. Consider this strategy if:
- You intend to resume your employment with that former employer at some point in the future.
- You have more attractive investment options at your old 401(k) that are no longer available to you at your new company.
- The overall cost and service of your old 401(k) is more beneficial than that of your new plan.
- Your old plan offered a Roth 401(k) option that is not available with your new 401(k) plan.
- You own company stock in your previous employer’s plan that isn’t transferable to your new plan.
When to transfer funds from your old 401(k) to a new one
In many cases, consolidating your 401(k) plans is the right move simply because it makes it much easier to keep track of your investment portfolio.
A lesser-known reason to consolidate 401(k) plans is that it may give you more options in terms of loan privileges. For example, if you’re purchasing a home and would like to take the maximum loan available for your down payment, you may need a greater value in your 401(k) plan to reach that maximum. You can typically only take loans from a plan that you are making active contributions to, so in this case consolidating your plans could make the most sense.
When to consider working with a financial advisor vs. using an employer 401(k)
A third option to consider: does it make more sense to transfer management of your retirement funds to a financial advisor? If your employer doesn’t offer a strong 401(k) contribution match, or if the fees associated with your employer investments are high, it may be time to seek outside help.
Financial advisors also offer assistance that may not come with your employer retirement account. What kind of access do you have to assistance in determining the best mix of investments based on your risk tolerance with your current 401(k) plan administrator? Is that assistance enough to make you comfortable with your investment choices?
It’s also important to ask yourself – are you keeping your investments with your employer simply because it’s convenient, at the expense of growth opportunities? An advisor may be able to help you make more advantageous investment decisions, without sacrificing convenience or level of service.
Understanding the risks and rewards of your investment options can feel overwhelming, but dedicating some time and focus to your retirement planning will pay off in spades in the long run. Take it one step at a time, and seek advice if you’re becoming uncomfortable with the fluctuation of your investment portfolio. Always keep an eye on and perspective about the long-term potential versus short term fluctuations.
