You've changed jobs...What should you do with your old 401k?

I’ve had a couple of friends and clients go through job changes recently. Perhaps it can be seen as a sign of a strong job market, when people are moving from one employer to another for a career advancement. With this in mind, I thought I’d write a short column regarding what to do about your employer sponsored retirement plan when you go through a job change.

In modern times, a much smaller percentage of workers will spend their whole career working for one employer than in prior generations. When you change from one employer to another, what are your options and what should you do with your retirement plan? Much like most topics in financial planning, this question doesn’t have a single right answer.

When you’ve left an employer, you typically have a few options on how to handle your retirement accounts:

• Leave it where it is. Most plans allow (perhaps even encourage) former employees to keep plan balances within the plan. More plan participants and plan assets create greater cost efficiencies for the plan.

• Cash it out. Very rare that this is your best option. There are tax consequences and depending on your age, penalties for early withdrawal.

• Rollover to your new employer’s plan. Most plans allow you to rollover assets from a former employer plan to a current employer plan.

• Rollover to an IRA. This option typically gives you the greatest amount of choice and control, while keeping the money tax deferred.

• Rollover to an IRA and convert to a Roth IRA. This has tax consequences to consider, but can be a viable option in some cases.

Which option is best for you? Here are some questions that will help guide you about what to do:

• What are the investment options available to you through the existing plan? Are you offered enough choices to adequately diversify your investments? Are the fees and expenses reasonable?

• How much do you understand about the markets and investing? Are you comfortable choosing your investments alone? Are you comfortable monitoring them on your own?

• How many plans from former employers do you have? Is it manageable? Are you able to keep perspective of the big picture with multiple accounts?

With these things considered, you can make a more informed decision about your savings. It’s important to understand all of the ramifications of your choice.

You may want to consider speaking with a financial professional to discuss.

One other note to consider when choosing a financial professional: Be sure you know what type of advisor you are speaking with. An advisor from an insurance company probably makes a living selling insurance products and annuities. An advisor with a brokerage firm (even some independents are representatives of brokerage firms) makes a living selling investment products and earning commissions. An advisor with a Registered Investment Advisor makes a living providing investment advice and charging a fee for the service. Only an advisor from a Registered Investment Advisor is bound law and fiduciary duty to act in your best interest solely. His/her compensation is not determined by what products or investments you buy. Any compensation he/she receives from serving you must be disclosed. I think it’s fair to say that an advisor with a Registered Investment Advisor faces much less conflict of interest than any other platform. The advice provided is much more pure to your needs; it has to be to meet the fiduciary duty that only an RIA representative is held to.

So, Good Luck with the new job!