The 401(k) is now the most common type of retirement plan offered by employers, replacing the antiquated pension plans, popular some 50 years ago. Millennials have set the tone for frequent turnover in the American workplace. Because jobs are changing so often, many company benefits—like retirement funds—are left hanging in the balance. This means you may have an old 401(k) or two from previous employers. If so, you’ve probably asked yourself, “What do I do with my old 401(k)?”
While you may be able to keep your old 401(k) sitting where it is, a rollover to an Individual Retirement Account (IRA) might be your best bet.
What is an IRA rollover?
A rollover means that you are moving your money from an employer-sponsored retirement plan—your 401(k)—to an IRA. Because it’s going from one pre-tax retirement account to another, there are no taxes or penalties owed on the transfer.
Let’s explore three reasons why a 401(k) rollover could be beneficial for you:
1. Avoid the trap of performance chasing.
“Performance chasing” means investing in mutual funds that are recent winners. Advisors and plan sponsors of 401(k)s fall into this trap when selecting what mutual funds to include in your 401(k).To show they are doing their job, advisors will load up your 401(k) with mutual funds that have a strong recent performance (yesterday’s winners). However, when one of these funds underperforms for a few quarters, the advisor will switch it out with a new mutual fund that had recent success. Performance chasing means your money will perpetually be moved to yesterday’s winner. This is not a good long-term investment strategy.
2. Engage with your investments.
One of the best features of a 401(k) is automation. You contribute automatically from your paycheck, you might have been automatically enrolled, and you can have your contribution amount increased automatically every year. However, a side effect of automation is apathy. Participants often neglect 401(k) maintenance, are unaware of their investment mix, and don’t know how their 401(k) fits in with their larger financial picture. A rollover to an IRA can kick your retirement savings into high gear by encouraging more engagement with your money. You can pick where your IRA is opened, how it’s invested, and how it can be incorporated into your financial plan.
3. Exercise more control over your nest egg.
Moving your money out of your company’s retirement plan into an IRA allows you to exercise more control over your funds. You now have access to thousands of investment options, as opposed to the menu of mutual funds chosen by your company. You can also take advantage of a Roth Conversion, which can potentially save you thousands of dollars in future tax savings. Or, you can choose to enlist the expertise of an investment advisor to pick the right portfolio to help you reach your goals.
A 401(k) can be a great vehicle to accumulate retirement dollars if you are employed at the same place for a long time. However, should you decide to change careers, you now have the opportunity for a rollover to an IRA.