Home & Family Finance Resource Center
Sunday, February 7, 2016
Your 401(k) Manager Not Always Best AdviserCenter for Personal Finance editors
If you're leaving a job with a 401(k), the fund's provider may encourage you to roll your money into an IRA (individual retirement account). This might not be your best option. Before making any decisions, get details from your plan's administrator and, if necessary, consult a financial adviser or tax specialist for complete information about the rules, tax consequences—and fees.
According to a report released by the Government Accountability Office (GAO) in spring 2013, seven out of 30 money management firms gave incorrect information to undercover investigators posing as employees about to change jobs.
Some of the money managers told GAO investigators that an IRA would be "free," even though enrollees pay ongoing fees. Half of the large money management firms that the GAO reviewed, also incorrectly stated on their websites that their IRAs were free.
Money managers have a financial incentive to convince workers to roll their 401(k)s into IRAs because they can charge larger fees for handling the new accounts. The GAO reported that the money employees move out of 401(k)s when they change jobs accounts for 90% of all new IRA funds.
If you're switching jobs, you have four options for how to handle your 401(k):
- Leave the money in your former employer's plan—Review your plan's investments, fees, services, withdrawal restrictions, and distribution rules. Then compare the plan with other options.
- Move it to your current employer's plan—Compare your new employer retirement plan with your current plan and both types of IRAs: traditional and Roth. Evaluate investments, services, withdrawal restrictions, loan provisions, distribution options, and fees.
- Convert it to an IRA—To help determine if this is a good option, consult a certified financial adviser or an IRA specialist at your credit union.
- Cash it out—Use this option only as a last resort. Make your best effort to keep your retirement savings intact and carefully consider other options.
Cashing out your 401(k) most likely is the worst option. Not only would you have to pay taxes on the money you withdrew but, if you're younger than age 59 ½, you would pay a 10% penalty as well.
And if an IRA requires more fees than you would pay by leaving your savings in a 401(k), that may not be the best option either.
Regardless of which option you choose, the best course of action is to keep saving. A 401(k) can provide you a comfortable retirement, provided you're saving consistently and avoiding too many fees.