Changing Jobs Near Retirement? How You Manage Your 401(k) Transfer Matters — Here’s Why
Written by
Yaël Bizouati-Kennedy
Edited by
T. Woods
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Changing jobs can be an exciting adventure — whether it’s for a better salary, due to a relocation or for professional growth. That said, if you change jobs near retirement, there are a slew of considerations to factor in as well.
For instance, when it comes to retirement plans, what you do with your old 401(k) can not only be tricky and difficult to navigate, it’s something that can also be easily overlooked.
Indeed, according to Capitalize, as of May 2023, there were 29.2 million left-behind or forgotten 401(k) accounts holding $1.65 trillion in assets, up from 24.3 million and $1.35 trillion in May 2021. This represents a whopping 25% of all 401(k) plan assets, up from 20% in May 2021.
In turn, this translates into many missed financial opportunities and returns, and unnecessary fees paid.
“As you approach retirement, in my opinion, you really want to focus on reducing unnecessary complexity in your financial life,” said Chris Urban, founder at Discovery Wealth Planning, adding that this includes consolidating relationships with financial companies, reducing the number of investment and retirement accounts you have and simplifying the makeup of each of these accounts.
Here are some options financial experts recommend:
Everything Under One Roof
In most cases, bringing all your investments to one institution can help make life simpler and more convenient — and maybe even save you some money, said Rita Assaf, Vice President of Retirement Products for Fidelity Investments.
As Assaf explained, a consolidated view of your accounts, with a single company or software that provides a complete view of your finances, can make it easier to track your asset mix, tax situation and financial life.
“If you consolidate assets with a single company, you may become eligible for lower commissions and fees, additional services and even fewer fees,” she noted.
Other experts have agreed — for instance, it’s often beneficial to have everything in one place so you only have one account to keep track of.
However, if that’s the route you choose, you should review and compare the investment options and all related fees -such as fund manager fees and administrative fees- of your new 401k with your old 401k.
“And make sure that the fees for the new plan are comparable, if not lower, than the fees with your old 401k plan,” said Carla Adams, founder and financial advisor at Ametrine Wealth.
Roll Over Your 401(k) Into an Individual Retirement Account (IRA)
Rolling over a 401(k) into an Individual Retirement Account (IRA) can offer a broader range of investment options compared to many 401(k) plans, some experts have argued.
Indeed, as Taylor Kovar, CFP, CEO and founder of Kovar Wealth Management, noted, IRAs often have lower fees and more flexibility in terms of investment choices.
“Additionally, consolidating multiple 401(k) accounts into one IRA can simplify the management and tracking of retirement funds,” said Kovar. On the other hand, he suggested that IRAs may lack some of the creditor protections offered by 401(k) plans.
“Also, if you are 55 or older and leave your job, you can withdraw from your 401(k) without the 10% early withdrawal penalty, a benefit not available in an IRA,” he said.
Leave Your 401(k) With Your Former Employer
Perhaps the easiest solution is to leave your retirement plan with your former company — that is, if you are satisfied with the investment choices and fee structure.
“This option can be beneficial if the plan offers unique investment options, lower fees, or strong creditor protections,” said Kovar.
Yet, he also noted that managing multiple 401(k) accounts can be more challenging, and not all employers allow ex-employees to keep their funds in the plan.
“Additionally, required minimum distributions must be calculated and taken separately for each 401(k), which can be inconvenient,” he added.
Fidelity’s Assaf cited another reason to keep you plan with your former employer: If it offers retirement income options, such as a guaranteed income solution that allows plan participants to convert all or a portion of their retirement savings — from a 401(k), 403(b) or 457(b) — into an immediate income annuity to provide consistent, pension-like payments throughout retirement.
Consider a Deferred Income Annuity “DIA” for a Portion of Your Retirement Dollars
A deferred income annuity is a fixed investment, where a lump sum of money is invested to create a future periodic income stream, determined by the owner (usually the annuitant), for the remainder of the annuitant’s life, said Greg Olsen, CFP and partner at Lenox Advisors.
“An advantage of this strategy is that the portion of the 401(k) that is rolled over into a DIA is no longer subject to market fluctuations, as the payments that start when the client plans to retire are fixed and guaranteed not to change,” said Olsen.
Another advantage, he said, is that since the client cannot outlive this income stream, the guesswork is removed from how much income to take.
“The downside is illiquidity as the decision is irrevocable. Once the deferral starts, the payout date can move forward or back, depending on the company, but the investment is no longer liquid or accessible in a lump sum,” he added.
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