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The Smart 401(k) Rollover Option That Almost Everyone Forgets

Taking your retirement-plan money when you switch jobs and going on a spending spree would be a costly mistake, resulting in higher taxes, penalties, and lost investment opportunities. But even if you know enough not to treat your retirement account as a windfall, it's hard to get good advice on what to do with it instead.

Back in March, the Government Accountability Office took a close look at how workers handle 401(k) retirement plans when switching jobs. What the GAO's study found was that while the current process has a bias toward pushing workers toward rolling that retirement savings into IRAs, people often overlook another option: moving their retirement assets to your new employer's 401(k) plan.

Let's take a closer look at the options you have and which one makes the most sense in your situation.

Three Choices

When you switch jobs, you'll typically have three options of what to do with the money in your employer-sponsored retirement savings account.
  • You can roll it over into an individual IRA at the financial institution of your choice.
  • If your new employer offers a 401(k) plan, then you can transfer the assets into your new employer's plan.
  • And lastly, if you have enough money to satisfy your existing plan's minimum account balance for former employees -- usually $5,000 -- you can keep your money in your old employer's 401(k).
The GAO found several pieces of evidence pointing to the tendency to push former employees toward IRAs. IRA providers tend to be more aggressive in seeking rollover business, as nine of the 10 providers the GAO reviewed advertised the fact that they offer assistance to workers wanting to roll over old retirement assets. New-account bonus payments of as much as $2,500 helped provide even greater incentives to choose an IRA.

By contrast, the number of people using plan-to-plan rollovers is much smaller, with the GAO pointing to one plan sponsor that reported about 10 to 15 percent of participants moving their retirement savings to new-employer 401(k)s.

With the need to coordinate paperwork for both sets of plan administrators, workers found it far more difficult to get through the obstacles to getting their old retirement money into their 401(k) account at their new employer.

When a 401(k)-to-401(k) Transfer Makes Sense

Cost is a key component of choosing a retirement-savings option, and some 401(k) plans charge higher fees than you'd get by selecting a low-cost IRA investment. But in some cases, sticking with a low-cost 401(k) makes more sense than picking an IRA.

Many employers foot the bill for administrative and record keeping fees and offer low-cost institutional-class mutual funds among their investment choices, providing annual savings over the mutual fund shares more readily accessible to ordinary investors.

For less sophisticated investors, the security of having a plan administrator who bears fiduciary responsibility under retirement-plan law for the investment choices a 401(k) plan offers can be helpful. Although that responsibility hasn't led all plans to have the best possible investment options, it does provide remedies that aren't available to those who invest in IRAs. And, although IRA providers tout the advantages of flexible investing strategies, those who don't know much about investing aren't in a position to make maximum use of that flexibility.

Consider All of Your Options

The GAO study serves as a good reminder that a rollover IRA isn't your only option when it comes to considering retirement-savings options.

If your new employer offers a high-quality plan with low-cost investment options, your best bet will often be to roll your old retirement savings into that plan, despite the administrative challenges you might face in doing so.

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Ginny Chan

One of the smartest things I ever did...ditching the whole life insurance I was paying $400 a month for for a $15 term policy from LifeAnt for the same death benefit, and saving the difference to my retirement accounts. I was told to put the money in my roth though before my 401k, because I was already contributing the maximum that would get a match for my company (5% for a 4% match). I do have to say that with a match, when you put money away, get some advise about a conservative but GOOD allocation, and just keep at it, it adds up really fast. After 5 years I have over 100k in mine.

April 09 2014 at 10:46 PM Report abuse rate up rate down Reply

I have to admit that I am among the many who was guilty until just a few months back of not rolling my 401ks over into accounts that could actually live all in one place and I could keep a closer eye on, not to mention better control. If you are sitting on your 401k, do yourself a favor and roll in over. I recently wrote an article that includes a quiz to help you better gauge whether it is time to take this step:

February 24 2014 at 8:04 PM Report abuse rate up rate down Reply
thomas stephen

Give away your money when youlet afinancecompanytake control ofyourold 401-k,theywant the fees,do the homeworkandinvest your moneywith yourlocal bank, it will be protected from the vultures in the stock business

July 11 2013 at 7:15 AM Report abuse rate up rate down Reply

In my case very true and you are wrong. I invested in a 401k for years and no retired. My 401k did very well and I also invested in individual stocks the last 33 years and have done very well. Have paid cash for 2 houses and the last 4 cars were paid off with cash. No credit card debt, all because of the stock market.

June 21 2013 at 12:53 AM Report abuse rate up rate down Reply

If you are not bright enough to know the options, ask cousin Dave or someone else 40 years old.

Ask the HR folks in the Co you are leaving and/or the company you are going to. This article assumes people are total idiots.

Plus, it does not have to be done overnight. Little harm done if you just temp roll it with someone like Fidelity. They offer no fee IRA's, well maybe you have to have $5,000 or so. Trade are $7.95, and if you have a fairly large a/c, anywhere from 25 to 50 free trades the first year. Not touting Fidelity, just who I used. Other outlets will do the same/similar.

June 20 2013 at 3:44 PM Report abuse rate up rate down Reply

You had better check and be sure that your new employer allows a rollover into his 401K Plan. Not all plans do.

June 20 2013 at 11:38 AM Report abuse rate up rate down Reply

What investors don't know about these 401k ripoffs is scary. A simple two percent management fee can over a lifetime of saving cost a hundred thousand dollars in fees! Sum bug gives good advice. Index funds way to go.

June 20 2013 at 12:01 AM Report abuse rate up rate down Reply

Rolling over your existing 401k to a new employer is extremely risky, your betting your new employer is capable and honest when it comes to watching your money. Far better to rollover the 401k to a low cost service provider (Vanguard, Fidelity, TRowePrice, for examples) who have a long history for managing your funds.

With the new employer, start a new 401k and move forward.

June 19 2013 at 5:40 PM Report abuse +1 rate up rate down Reply

How about paying taxes on it and roll it over into a Roth?

June 19 2013 at 12:56 PM Report abuse +2 rate up rate down Reply
1 reply to duey35's comment

If you happen to be lucky enough to have a mid- six figure 401K the tax penalty can be significant. Beter to either roll it into the new employers plan or establish a seperate traditional, non ROTH IRA, then when you need the money you can control the amount you withdraw annually, and the taxes due, subject to minimum withdrawl rules.

June 19 2013 at 8:26 PM Report abuse +2 rate up rate down Reply

huh....what IRA? I never could get my foot in the door with a company that offered a retirement plan.

June 19 2013 at 12:31 PM Report abuse +1 rate up rate down Reply
2 replies to cslinz62's comment

I cannot imagine who's fault that might be.

June 19 2013 at 10:00 PM Report abuse -1 rate up rate down Reply

Anyone can open an IRA. You need to meet the government's eligibility rules for IRA's, and the brokerage house's minimum investment requirements. Beyond that, anyone can open an IRA.

March 01 2014 at 11:11 PM Report abuse rate up rate down Reply