IT’S YOUR MONEY: What to do with your 401(k) when changing jobs

Published: December 10, 2013, 8:00 pm

When you change jobs, you need to decide what to do with your 401(k). Generally, you have four options.

If you have a balance of at least $5,000, you should be able to leave it with your previous employer. You should also have the option to roll over your 401(k) to your new employer’s plan, roll it over to a self-directed IRA or take a lump sum, which can have major tax implications.

The primary factors to consider in making this decision include the quality and diversity of investment options, cost, control, convenience and asset protection.

An IRA generally offers a broader variety of investment options than a 401(k). An IRA provides you with access to a large variety of mutual funds, CDs, individual stocks and individual bonds. If your previous or current employer’s 401(k) plan offers a limited or mediocre selection of mutual funds, a rollover IRA may be your best option.

In addition to providing a greater selection, an IRA generally provides you with more control over your retirement plan. With an IRA, you have complete control over the selection of and changes to the investments in your account. With a 401(k) plan, you are limited to the choices available within the plan, and you must follow the guidelines regarding how frequently changes can be made. You are also subject to changes made to investment options available in the plan.

And if you become disillusioned with the plan, you can’t just switch 401(k) administrators. But if you become dissatisfied with an IRA provider, you can move your IRA to a different provider.

Another consideration when making decisions on your 401(k) is cost. Fees and expenses can vary dramatically between 401(k) plans. Under a new law requiring employers to disclose administrative fees and expenses to employees, it has become easier to compare 401(k) expenses. Large plans may have the volume buying power to buy low-cost institutional mutual funds, which may be cheaper than an IRA. But other 401(k) plans may charge high expenses, in which case an IRA may be a better option.

Convenience and simplicity are additional factors to consider. Depending on your situation, it may be more convenient to consolidate all of your funds by rolling your 401(k) into an IRA with the company holding your other accounts. If you use a financial planner, he or she can provide you with more assistance making recommendations, monitoring your investments and rebalancing your portfolio if it’s in an IRA.

Finally, if asset protection is a major consideration, 401(k) plans are protected by federal law against most lawsuits, whereas IRAs fall under state jurisdiction, which can vary by state. An umbrella liability policy can help mitigate this risk. If it’s a major concern, call your attorney.

-

Jane Young is a certified financial planner.
Contact her at gazette@itsnotjustmoney.com.