The Best Options For Your Old 401k(s) – A Step-by-Step Guide

So, how many different companies have been at in your working career? If you’re like most people today, you’ve probably switched jobs at least a couple times. It seems like some people can switch every six months while others can stay for years.

Regardless, it’s extremely rare to see someone who stays with the same employer for life. Things have certainly changed from the baby boomer generation.

When it comes to moving on to a new job, you eventually have to figure out what to do with your old 401k.

Should I rollover my 401k to my new employer?

Should I rollover my 401k it into an IRA?

Should I leave my 401k where it is?

How long do I have to rollover my 401k from a previous employer?

How do I even find old 401k accounts?

And no, I’m not even going to mention withdrawing it and paying the 30-50% in taxes and penalties. Notice, the name of this article is the “best options for your old 401k’s” rather than all options.

When it comes to rolling over these old 401k’s, though, some of us are better at checking this off the list than others.

I see a lot of people just leaving their old 401k at their previous employer because life gets in the way and they just forget about it. Heck, that might even be the right thing to do but more often than not, it isn’t.

So, if you have some old 401k’s lying around out there, keep reading.

For the most part, consolidating your old retirement accounts into your current one or an IRA is typically the best choice for most folks.

It makes it easier for you to have all of your retirement accounts in a single account and I can assure you it will make it much easier on your spouse if, God forbid, something were to happen to you.

Regardless of the choice, it needs to be well thought out, educated and, most importantly, in your best interest.

With that, let’s take a look at the best options for your old 401k’s so that you can be confident you’re making the right choice for your situation – and no, doing nothing isn’t a choice.

Leave Your 401k With Your Old Employer

By far the easiest choice and the one I see the most is leaving a retirement plan with the old employer. However, it’s not because of the due diligence performed, but rather making the choice of doing nothing.

Hey, sometimes, it ends up being the best choice, but more times than not, it ends up being the worst of the other two possible options.

Let’s look at the reasons you would want to leave it with your old employer’s 401k.

1. It has low administration and operating expenses – typically, the larger the plan, the less in fees you should be paying. However, I will mention that finding these types of fees can be like trying to find a needle in a haystack. A lot of times, the plan administrator doesn’t even know what they are. To find out, you will need to request the 401k Plan Document and all expenses will be listed within.

2. It has great funds. A lot of times, great funds equals low expenses on those funds, but sometimes it doesn’t. If the plan has access to quality performing funds and the admin and operating expenses are reasonable, then it may make sense to leave it right where it is. As mentioned previously, when it comes to large 401k plans, because they offer economies of scale, this means they can provide access to the institutional fund share classes, which means much lower fund expenses.

3. You’re going to need to access this 401k between ages 55 – 59.5 (this is the one that can be a real eye-opener for a lot of people). Whether it’s retiring completely and/or just cutting back on hours, for some reason, you’re going to need to be able to access these funds between those ages. Here are the reasons why.

1. If you roll it over to your new employer's 401k, then you won’t be able to access it until you leave that employer, even if you reach age 55.
2. If you roll it over to an IRA, then you won’t be able to access the money penalty-free until age 59.5 – no matter what your financial advisor might be telling you. It’s in most financial advisors' best interest to recommend moving your 401k into an IRA under their management, since that’s how they get paid (for the most part). However, it might not be in your best interest, which kind of defeats the point. With that said, if you’re going to be working with a financial advisor, just make sure what they’re recommending is what’s best for you and not them.

If you can answer yes to one the three above, then it might make sense to have your old 401k stay put. However, it’s usually not that simple.

If you have no idea where to start, then it might make sense to speak with your old plan administrator to see if they can help. If not, then I would recommend calling in a completely unbiased third party to help with the due diligence – and yes, you will have to pay them. Also, feel free to check out Brightscope as they have a lot of information on company 401k plans.

As I see most of the time, it does make sense to go with one of the other two options below, but in some cases, it can make sense to leave it with your old employer. It really comes down to the expenses, the funds, and if you need access to this money between the ages of 55 – 59.5.

Move Your 401k To Your New Employer

Your second option is to transfer your old 401k to your new employers 401k. This option does involve a little more work, which is probably why so many people just leave it with their old employer.

However, I would venture to say that a lot of people don’t even realize they can do this in the first place. Let’s face it; there’s not a whole lot of education on 401k rollover options.

So, is moving it to your new employer the right option? As always, it depends. If your old employer has an awesome 401k and meets at least one of the criteria from above, then it might make sense to leave it.

However, if your new employer has an equally awesome 401k (good funds, low expenses, etc.), then it makes more sense to consolidate it.

All things being equal, if your new employer's plan is as good as or better than your old employer's, then I would recommend moving it. Just having things consolidated will make your life easier.

And, if you’re not sure whose plan is better, then you’re going to need to do some digging on your part. Your options would be to review and compare plan documents from each 401k, hire somebody, or check out Brightscope to see if they can provide any insights on the plans.

With all of this being said, don’t forget about #3 from above. If you expect to need this money from ages 55 – 59.5 and you still plan on working, then you won’t be able to access your old employer’s plan if you transfer into your new 401k.

There’s really no way to tap into a 401k where you’re currently working unless it’s through hardship or loan (and please, don’t do a 401k loan). Even then, you’re going to be limited in what you can withdraw.

Most of the time, this doesn’t come into play since you’ll still be working. However, if you’re thinking about cutting back hours at age 55 and will need additional income to supplement your lifestyle, then leaving your 401k where it was may just make a lot of sense.

As opposed to beating this into the ground anymore, let’s move on to your third option.

Roll Your 401k Into An IRA

This is only from anecdotal evidence on my part, but rolling over your 401k into an IRA is the second most popular option outside of leaving it.

I would guess this to be the case from the astronomical amount of ads on television and internet encouraging you to “rollover your 401k into an IRA” – it’s quite a lucrative business.

However, a lot of times it does make the most sense. As always, though, it depends.

Like I mentioned previously, if your old employer’s 401k is an awesome plan with low expenses, great funds, and you can leave it there, then it’s probably best to leave it – unless there is some personal reason for you wanting to move it.

If that’s not the case, then it comes down to your new employer’s 401k or an IRA. When it comes down to these two choices, it’s really just personal preference.

If your new employer’s plan is great, then, by all means, consolidate there. If it’s not so great, then check out the IRA route.

However, you must know that not all IRA’s are created equal. You have the DIY IRA, and you have the advisor-managed IRA.

If you’re so inclined to manage your own investments, and you know what you’re doing (and yes, people can handle it – and yes, that’s coming from a financial advisor), then, by all means, take over the reins.

If you’re not up for the DIY route, then your other choices are to go with an IRA that’s managed by a financial advisor or by a robo-advisor.

A robo-advisor (Betterment, Wealthfront, Personal Capital, etc.) is basically just a company/website that will professionally manage your IRA at a lower cost than a real person.

In my opinion, they are very cost effective and do an outstanding job managing investments. But, just know that you’re only going to get investment management only – no more, no less. But hey, that might be all you need.

If you go with a (real person) financial advisor, then you’re probably going to pay around .75-1.50% annually. Some will also charge commissions, but (my personal opinion) I believe it would make more sense to go with a robo-advisor than a commission-based advisor – again, my opinion.

Regardless, a financial advisor is most likely going to be more expensive than your 401k and more expensive than a robo-advisor.

With that said, not all financial advisors are created equal either. If you’re going to be paying someone .75-1.5% a year and all they are providing you is investment management, then that is some really expensive investment management. They better be giving you some extraordinary returns – which I’m guessing they’re not.

The extra .75-1.50% you are paying should not only include investment management, but also comprehensive A-Z financial planning that looks at and make recommendations for your entire financial picture.

So, if you’re going to roll over your old 401k into an IRA that a financial advisor is going to manage, then you better know exactly what you are getting. Even if they are recommending you roll it to an IRA, it may not always be in your best interest – and again, this is coming from a financial advisor.

Also, remember that if you do roll it over to an IRA that you can’t touch this money penalty-free until age 59.5. So, if you think you’re going to be needing this money between ages 55-59.5, then it might make sense to leave it in your old 401k.

Regardless of what decision you make, put some time into making the right one for you.

Investments, 401k’s, and IRA’s are confusing. Over time, though, they can make up the majority of your net worth. Plus, these are the accounts that are going to provide your income in retirement.

With so much of your future relying on these accounts, I implore you to do a little research or hire someone to help you make the decision that’s in your best interests. Your future self will be grateful.