What should I do with my old retirement plan?
Today we answer a question from Adam. He asks, “I changed jobs a couple of months ago. What should I do with my old retirement plan?
- Your options
- The pro’s and con’s of each
- The key factors in your decision
- And what you should ask a financial advisor about a rollover
Listen now: What should I do with my old retirement plan?
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- What should I do with my old retirement plan?
- Can I use a trust to protect Mom’s assets if she goes to a nursing home?
- Should I use my employer’s new Roth 401k option.
- How do I use my savings to create retirement income?
- Can I make the maximum contribution to both a Roth IRA and the Thrift savings plan?
Transcript: What should I do with my old retirement plan?
If you have changed jobs and left a retirement plan behind, you’ll have four options.
- You can leave it in your old employer’s plan.
- You can potentially roll it over to your new employer’s plan.
- You can roll it over to an IRA.
- Or, you can take a distribution
Leave it in your former employer's plan.
- Cost. Your former employer’s plan may be one of the lower cost options. If that’s the case, then it may make sense to leave it there.
- Familiarity. You’re also familiar and comfortable with how the plan works.
- Adds Complexity. Leaving your money in the plan makes it harder for you to keep things organized.
- Limited Investment Choices. With any retirement plan, your investment choices can be limited. You don’t have as many options to invest your money. Most plans have enough options to help you achieve your goals.
- Lack of Help. It may be difficult to get the help you want when you need it. You’re stuck calling a call center.
There aren’t many advantages to leaving it where it is.
Roll it to your new employer's plan
If your new plan allows it, you can roll it over to your new employers plan. Some plans don’t allow this. You’ll need to check to see if your current plan does.
- Simplicity. This can help you keep things organized. And it will help you see how you’re making progress towards your goals. That’s the biggest advantage.
- Cost: You need to look at the cost of the plan. If it’s more than what you would pay in an IRA or your former employers plan it may not make sense to roll it to your current plan.
Roll it over to an IRA
You can do this many ways. You can work with a financial advisor, a bank, or insurance company. You can also use someone like Vanguard, Charles Schwab or TD Ameritrade.
- Control. You control every aspect of that IRA. You control the investment choices and the cost.
- Nearly Unlimited Investment Choices. There are very few restrictions for what you can own in an IRA.
- Access to the Money. Some retirement plans may restrict your access to the money. You’ll have complete access to your money in an IRA.
We can’t think of any disadvantages to this.
Take a distribution
This is probably the worst option, unless you’re in a dire financial situation. A distribution means taxes and penalties when you withdraw the funds.
Key factors in your decision
There are costs for any of these choices. Some costs are hidden. These are the internal costs of investment choices. Some of those are very low, some of them may be a lot higher.
Every plan has mutual funds or exchange-traded products. Those have an internal expense structure. In some cases, you may incur record keeping costs.
Many employers pass record-keeping costs on to their plan participants. They have to disclose it to you and it will appear on your statement.
Some plans have management fees. These also have to be disclosed. These will also appear on your statement. An IRA may have management fees, especially if you work with a financial advisor.
There could be other costs, too. You might pay commissions. If you select an insurance contract, you will likely pay a commission. You may also run into things like surrender charges, and other expenses for things like annuity contracts.
IRAs allow you to control your situation. Retirement plans are more limited in that regard. They have limited investment options and limited access to your money. IRAs give you complete access to your money and complete control over the investments.
Convenience and Simplicity
Money is complicated enough. The more complications you add, the harder it is to reach your financial goals. You want to have it someplace where you can keep an eye on things and monitor your progress.
Financial advisors and rollovers
Financial advisors make their living from retirement plan rollovers— including us. There is going to be a cost to you to do this when you hire a financial advisor. It may be more or less than what you currently pay.
Conflicts of Interest
This cost creates a conflict of interest. When an advisor prompts you to complete the rollover, it doesn’t matter if they’re a fiduciary or not. Whether they charge a commission or management fee, it doesn’t matter. Any financial incentive for the advisor to help you roll over your balance creates a conflict of interest.
But, if you see the value to having someone help you and the value is worth what they charge, hire that advisor.
You need to ask relevant questions. Know how your advisor is going to be paid for that rollover. Is it going to be a commission or is it going to be a management fee? Know if what you’re going to pay is a one time charge or if it is ongoing.
And you need to know what other costs you’re going to incur. What types of investments is that advisor going to use? Are there surrender charges? Are there other hidden fees?
Be prepared and understand how the relationship will work. Make sure you are comfortable with every aspect of the person you hire.
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About the Author
Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors. He specializes in helping hard working, middle class families plan for retirement.