Rolling Over Into Retirement
After changing jobs a few times during the course of his career, Scott Vasko is up to his third 401(k) plan and now wonders whether it's time to roll them all into the one offered by his current employer.
Vasko, 44, is director of the retail and hospitality practice at Root Learning, a consulting firm. He has been actively managing the accounts he left behind, and it's been relatively easy to do online, he said.
"But the more I think about it, it would be nice to have it under one roof," he said.
Holding more than one 401(k) plan is becoming increasingly common nowadays, as people change jobs more frequently. According to one Labor Department survey, workers go through 10.5 jobs on average between the ages of 18 and 40. With about 47 million active participants in plans nationwide, that means a lot of investors facing the same decision as Vasko.
"Many people become 401(k) collectors," said Barry Glassman, senior vice president of Cassaday & Co., a financial planning and investment management firm in McLean. "I've seen people with five, six or seven 401(k) plans scattered about."
When you leave a job at which you are entitled to retirement savings, you have a choice: Allow the retirement savings account to stay behind, or move it. If you leave it behind, your money can continue to grow and you may continue to change your investment mix, though you can't make additional contributions. Whether moving an account is the right choice depends on the relative attractiveness of past and present offerings.
For Vasko, combining all three plans makes sense not only for ease of managing his money, but also because the savings plan at his new job offers a large array of investments -- about 70 in all. It also has an option that could make investment management even easier, allowing participants to select a fund that represents the level of risk that suits them, ranging from conservative to aggressive. The funds are rebalanced from time to time to maintain the desired level of risk.
Vasko has hit on one of the key reasons investors may want to consolidate their retirement savings accounts, according to Catherine Gordon, who heads Vanguard's advice services group.
When considering whether to roll over accounts from previous jobs into your current savings plan, she said, "you should ask how flexible the new plan is, whether it's better in terms of the number of options" and whether it has lower fees or extra services that make it a better choice.
Employers are not required by law to let new hires move savings plan funds from previous jobs into a new account, and not all employers will let workers do so. In that case -- or if they are between jobs or retiring -- workers may want to consider consolidating former savings plans into an individual retirement account.
Until recently, if the beneficiary of a 401(k) plan was someone other than a spouse -- a daughter or son or domestic partner, for instance -- there was an estate-planning advantage to rolling that money into an IRA. Under the old rules, a non-spouse beneficiary of a 401(k) plan was required to withdraw the inherited funds over a shorter period of time than from an IRA. That usually meant a higher tax burden. However, recently passed pension legislation wiped out that difference.
One benefit 401(k)s and similar plans have over IRAs is that their statements typically provide more information on the long-term performance of investments than do statements from IRAs, said Jean C. Setzfand, head of consumer education and outreach for financial security at AARP. Still another advantage of retirement savings plans operated by large employers is that they may be big enough to qualify for lower fees, several experts said.
If you decide to roll over retirement savings accounts from other employers into your current savings plan, it will take some paperwork. After you notify your previous employer of your decision, you'll receive a packet of forms from the plan administrator that will include a discussion of the ramifications of different moves, forms that specify where the money is going, and, if you're married, forms for your spouse to sign.
In some cases, you will need a document from your previous employer verifying that you no longer work there before your new employer will accept the transfer. Once the paperwork is done, your previous employer will issue a check for the funds. You can have the check made payable either to the investment firm administering the new plan or to yourself. If the check is made out to you, you have 60 days to get it into the new account. If you miss that deadline, you'll be hit with federal and state income taxes on the amount withdrawn from the old plan and a 10 percent penalty.
The paperwork can be daunting, but it's a one-time chore balanced against the ongoing work of tracking several accounts and managing your investments, said Glassman. For instance, if you have several accounts and want to keep a balance of, say, 75 percent stocks and 25 percent bonds, it requires tweaking more knobs if you have multiple accounts.
If you have multiple sources of retirement income, it's also slightly more difficult to take a comprehensive view of how well prepared for retirement you are, said Vanguard's Gordon. Gordon said that when she contemplates her own savings, she has to nudge herself to remember that she has a small pension coming to her from a previous employer.
"I have to tell myself, don't forget about that $353 a month that will be coming from the bank," she said.
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