I’m a Financial Expert: 4 Reasons You’d Regret Combining Your 401(k) Accounts
Written by
Heather Altamirano
Edited by
Rebekah Evans
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Long-term employment is a thing of the past and as a result of moving from job to job, many employees accumulate numerous 401(k) accounts and forget about them.
According to research from Capitalize, a financial services company, “The number of forgotten 401(k)s increased by over 20% since May 2021 driven by a period of heightened job switching (“The Great Resignation”) with 3.8 million and 4.4 million accounts left behind in 2021 and 2022 respectively.”
Kevin Brady, certified financial planner (CFP) in New York City, told CNBC, “For many workers, the simplest option is to do nothing and keep the account active with an old employer.” Brady explained that the paperwork involved in rolling over funds into a new account can make the process even more painful.
While consolidating your 401(k) accounts from various employers does simplify tracking your overall finances, experts GOBankingRates spoke with don’t recommend it … here’s why.
Time Out of the Market
“The biggest disadvantage of merging 401(k)s from multiple employers is that in most cases you have to sell your existing shares and buy new ones as each company typically has specific funds to choose from,” said Mike Dion, senior manager of finance for a Fortune 100 entertainment company and founder of F9 Finance. “This takes you out of the market for several days, which could cause you to miss out on gains and dividends that compound over time,” he said.
Cost
The cost of combining your 401(k) accounts is something to consider, said David Oh, head of tax and estate planning at Arta Finance. “You’ll want to see what the expense ratios are for the investment options in the primary 401(k). They might be on the higher side — 1% or more — which can mitigate your returns over the long term.”
Limited Investment Options
According to Oh, another thing to consider before consolidating your accounts is limited investment options. “Oftentimes, 401(k) plans are working with specific financial institutions and do not have as many investment options as individual retirement accounts,” he said. These often include individual stocks, bonds and ETFs.
“Some employers,” Oh said, “do not even allow the option of rolling over a previous account into their plan.” He also explained other financial institutions might handle investment classes with better availability, variety and cost than your 401(k) custodian.
Dion agreed and suggested looking into better investment options, as “401(k) accounts are restrictive accounts that often have fees and limited fund choices.” He still thinks they’re worth it, though, due to company matching dollars — but this only applies to new investments.
“For existing investments, there are better options like an IRA conversion that lets you pick from a broader set of funds and pay lower to no fees if you pick the right brokerage,” Dion said. “IRAs also open up more options down the line like Roth conversions.”
Diverse Perspectives
There are negatives to consider before combining your 401(k) accounts, but a benefit to keeping them separate is greater access to resources, Oh said. “Having your 401(k) or other assets at different financial institutions might mean having more resources available to you with respect to advisors, tools and education.”
“Having diverse perspectives on financial decisions may help you make the optimal choice in the end,” he said. “Furthermore, you might be grandfathered into some benefits at your prior custodian that might no longer be available should you decide to forgo your relationship with them.”
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