Employees often have a sense of security associated with qualified workplace retirement plans (401(k), 403(b), etc.). It could be because of loyalty to their employer, belief in their retirement plan, or anything else.
But employees need to understand that workplace retirement plans are designed specifically in a conservative fashion to protect the employer from potential liability. And in many cases, the costs of administering the plans is the employees’ burden in the form of asset-based fees.
So while the plan is a big benefit while you’re working at a company, once you leave, it’s likely not as attractive. Beyond the fees, you won’t receive any more company match. For those reasons and others, it makes sense to take your retirement account with you when you leave.
An obvious reason to rollover your old retirement account into a personal account is to pay less in fees. If you participate in the plan, you pay the fees whether you work there or not. Most times, lower cost options are available for individual investors.
Workplace plans also usually limit participants to a fixed menu of investments. This constrains your ability to diversify and can really hamper you if your situation requires more flexibility. Leaving the account behind also makes it challenging to implement these assets into a broader strategy.
Most financial professionals recommend consolidating accounts into one platform. It’s easier to manage assets, and let’s be honest, you don’t want to remember another login.
Pitfalls to Avoid
If you have no strategy, do not roll your money over until you have one. When you move your money, you’ll have several options. Develop a strategy and stick to it – a financial professional can help greatly.
Knowing the rules is important. For instance, you can only do a rollover once every 12 months. You need to make sure you know where your money is going.
Cashing the account out can greatly harm your retirement journey because taxes and penalties will substantially eat into any withdrawals. If you really need the money, rollover your account to your new employer and consider a loan instead.
The final pitfall is risky investing. In general, retirement funds should be managed according to a strategy aligned around your risk tolerance and goals. It’s wise to avoid rollovers into penny stocks, cryptocurrency, or large singular stock positions.
In most cases, leaving your workplace plan at a past employer will do you more harm than good. We’ve even seen people forget completely about their retirement accounts from old employers, which is almost always a bad move!
So, if you’ve recently moved on to a new company or are considering a new job somewhere else, make it a point to bring your retirement plan with you.
Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.