When you leave an employer the decision on what to do with your 401k is probably more important than you think. There are 3 basic avenues to consider when making this decision.
Avenue 1: Rollover to an IRA
Rolling the account over to an IRA is the most common choice that is made, and for good reason. When you choose a rollover it opens up many new opportunities for your portfolio. This new IRA can be brought over to a new custodian and from there you will likely have a much wider array of investment choices. This is because typically 401k’s are limited to whatever the employer has chosen to provide as options. Included in these new investment options are alternative investments. These include private credit, private equity, real estate, and commodities which are traditionally not offered in 401k plans. With the new custodian you also have more control over the fees that your account is charged. You can choose if you’d prefer a low cost index ETF vs a higher cost actively managed mutual fund for example. The rollover also makes it substantially easier to do Roth conversions if you so choose, whereas in a 401k plan, the employer will choose whether or not you are allowed to do a conversion. Finally, it is much easier to have a fiduciary manage your IRA when they have full control and discretion over the account, rather than trying to have them manage a 401k where they have less control and less investment options.
Avenue 2: Rollover to new 401k
Another common choice is to rollover the old 401k into the 401k plan at your new employer. The biggest benefit of this option is that you can consolidate your accounts to make sure that you have your entire portfolio within your scope. With only having one location for your accounts it is easier to track and make sure that your contributions are being invested properly, and the investment manager is doing what they are supposed to. Another advantage is that it removes the funds from the old employer's plan in order to finalize a clean split from the company.
Avenue 3: Leave in old 401k
The final option is to leave the 401k with your old company. The benefit to this is keeping your portfolio status-quo. If you like the current investment options, performance of your investments, and fees charged by the custodian or manager, then the portfolio can stay. In short, if you are happy with the way things are, then there is no need to change.
There are a couple of options to choose from when you separate from the service of an old employer. The biggest benefit can be seen from rolling the account into an IRA where you can have more control over the investments and their inherent costs. From an IRA you also have more control over Roth conversion ability and taking charge of who is managing the portfolio. If you would like a second opinion on your financial plan and the portfolio that you have built, please reach out to us at (734) 681-7575 or email me at firstname.lastname@example.org