New Job Old 401K? Consider a Rollover IRA

Investment Management and Financial Planning

At some point or another in our lives, we have left a job to move on to another company. But too often, we forget to pack
one our most important personal items in our moving box, our 401k!   It’s easy to do really, given the comfort that
someone, somewhere is taking care of our money for us, right? Not quite. The truth is, nobody cares more about your
money than you do. Leaving your money in your old 401k plan is wrought with challenges and pitfalls. In most cases,
your best bet is to rollover the assets into a rollover IRA. Here’s why.

Few investments are more important than your retirement plan. Unfortunately, many Americans are regrettably “stuck” in
outdated, high cost plans that offer little if any diversification opportunities to grow their account successfully. Historically,
company retirement plans (this includes 401k/403b/457 plans) are plagued with many challenges that might dampen
the growth of your assets: high cost products, proprietary funds, hidden fees, lack of fiduciary oversight and limited
investment categories.

Investment Costs

Retirement plan participants often give up more than 2% per year in returns to cover fund expenses and they don’t even
know it! Compare that to a cost of less than 0.25% for an index fund. For every dollar you save on expenses or
administrative costs, that’s an extra dollar (plus compounding) in your nest egg. According to the Department of Labor,
fees can diminish your lifetime 401k/403b accumulations by as much as 30%.

Let’s put this statistic to the test.   After 30 years worth of saving $500 a month into a plan, a participant with a rate of
return of 8% over the period will have accumulated $745,179. Using the same scenario, but factoring in 2% of fund fees
will only generate $502,257; that’s a 32% reduction. Lesson learned: every penny counts!

Investment Choices

I’ve seen this time after time as I review clients’ portfolios. 401k plan choices tend to limit your available investment
universe to only a few U.S. based, large or mid cap mutual funds. If you’re lucky, you might get the choice of a small cap
or even an international fund, but not much else. That limitation of choices is a huge impediment on your wealth.

My point is, often times, the investment offering within a 401k plan is pretty abysmal and limited. As an active employee,
you have no choice but to stay within the confines of that plan. However, as a departed employee (retired or otherwise),
you have the right to liberate yourself from those constraints by rolling the assets into a self directed or managed IRA
rollover. You are free to buy virtually any security in that IRA, as long as you keep it on a platform that allows that (i.e. at a
discount brokerage firm like Schwab, E*TRADE, etc). After all, diversification and asset allocation is what will drive your
investments returns. So, shouldn’t you want to optimize what you already have?

Orphan 401k’s and Investment Strategy

A key to your financial success is to make sure that your asset allocation strategy is appropriately implemented across all
your various investment accounts. Casual investors tend to have multiple accounts, managing each in isolation of other
accounts they might own. This can invite investment overlap, portfolio concentration and poor diversification. What type
of investment strategy could you possibly have if you have accounts scattered around everywhere? From an investment
strategy perspective, all of those accounts really ought to be tied together with an investment strategy for maximum
efficiency.

Think of the following scenario, Maria is 56 and has changed jobs frequently throughout her career. As a result, she has
numerous ‘orphan’ 401K accounts. The paper statements are unread, user names and passwords forgotten, and there
has been no rebalancing for years. In fact, with so many accounts, she does not even know what the overall investment
allocations are of her retirement funds.

Why not include in your 2008 New Year’s goals the consolidation of your orphan accounts into a rollover IRA? That way,
you can keep better track of retirement funds and ensure that they are properly balanced.

Rollover Process

A rollover can be done one of two ways. At your request, the former employer will typically redeem the securities held in
your account. Then they may distribute a check of the proceeds directly to you, for deposit to your new IRA Rollover. You
then have 60 days to deposit those proceeds into your new IRA without taxes or penalty. Unfortunately, this method
leaves too much room for human error. What if (oops) you forgot you only had a 60 day window to do this and deposit the
check too late. Or, you could easily misplace the check in your pile of unopened mail.

The most efficient way conduct a rollover is to request that your plan administrator initiate a “direct rollover” or “trustee to
trustee transfer” as to avoid the chance of incurring an unforeseen tax or penalty. This means the check for the balances
of the old 401Ks will be payable to and sent directly to the trustee of the new account. You don’t ever see or touch the
money—probably a good thing. Obviously, you then receive account statements from your new IRA provider.

Advantages and Disadvantages of 401k and IRA’s

Where you decide to keep your retirement funds is really a personal choice. Armed with information on the advantages
and disadvantages of both 401k’s and IRA’s you should be able to make a more informed decision. Here are a few to
consider:

A traditional IRA can offer almost unlimited investment options; a 401(k) plan limits you to the investment options
offered by the plan

A traditional IRA offers easier access to retirement funds than a 401(k)

A traditional IRA can be converted to a Roth IRA if you qualify (more on this in another article)

A 401(k) offers the highest level of protection from creditors (the protection afforded to IRA funds depends on state
law). Note: Florida state law does allow IRA creditor protection, so this is a non-issue.

A 401(k) may allow you to borrow against the value of your account, depending on plan rules. Note: I do not
recommend you use your 401k as a piggy bank.

An IRA may provide more flexible distribution rules.

In closing, whether you’re changing jobs or retiring, it’s important that you make the right decision regarding your old 401
(k) or 403(b) plan. As you see, the process is quite simple. Keeping your assets in your old employer’s plan may or may
not be the most optimal solution for you. In either case, consider your options and the impact of your decision, or lack of
decision. But, remember, you gain incredible control and flexibility once you unlock your old plan. Consult with your
financial professional to ensure which choice is right for you.

My next article will focus entirely on the complex rules and types of 401k distributions. Stay tuned.

New Job Old 401K? Why You Should Consider a Rollover IRA
by Cathy Pareto, MBA, CFP®, AIF®

Back to Knowledge Center

The right to download, store and/or output any material on this Web site is granted for viewing use only. Use or viewing of this site acknowledges that you have
read, understand and will abide by our terms of use, legal notices, and disclaimers.