Like most people, you’ve probably switched jobs at some point in your career. If you’ve done this a few times, you may have several outstanding retirement plans, like a 401(k), 403(b), etc. In the flurry of paperwork between leaving your former employer and starting a new job, you should have been given the option to either leave the retirement plan as-is (default), transfer it to an individual retirement account (IRA), move it to your existing employer retirement plan or cash it out. If these plans aren’t consolidated after each job change, whether to an outside rollover IRA (or Roth IRA if you made after-tax contributions), or to your current employer retirement plan, they can start to accumulate and become more of a frustration later to deal with.
Consolidating your retirement plans has several benefits:
Investments align with the asset allocation your financial plan recommends
When you enroll in a new employer’s retirement plan, they ask how you’d like to invest the proceeds. You may not have even made a choice and were put into the default investment option. In the past, the default option was the stable value or money market fund, which is not designed to help you grow your assets; instead, it preserves the value with minimal interest. Nowadays, the default options are target date retirement funds that at least have a more diversified breakdown of assets between stocks and bonds.
Importantly, your financial plan may require that your investments be more aggressive (stocks) or conservative (bonds) than how your dormant retirement account is invested. Regardless of the account’s size, you want all of your investments functioning in a cohesive manner, as that investment allocation will drive the long-term returns necessary to achieve your financial goals.
Early in your career, you may not have been married or had any children, so the beneficiaries listed on those accounts may still be your parents, siblings or a friend. Or, you may have gone through a divorce and still have your ex-spouse listed as your primary beneficiary. If you were to pass away, retirement account beneficiaries have claim to the assets over who may really be your intended beneficiaries. This is because IRA and retirement plan beneficiaries supersede your will.
If you consolidate to one retirement account, you can just confirm the beneficiaries on that account instead of updating beneficiary paperwork for several plans. At a minimum, you should check your listed beneficiaries to ensure they align with your current estate plan.
Ensures you get the best investment options and lowest expenses
Not all employer plans have low-cost investment options within all of the necessary asset classes. In fact, many plans that smaller employers offer have high-cost investment options that even charge a front-load fee on every contribution made.
Ends the need to update your contact information in multiple places
It’s important to keep your contact information up to date on these plans because you don’t want mail or confidential information being sent to the wrong person. Also, not having your correct address and contact information on file will add extra steps to the consolidation process and for accessing account information.
Avoids having your former employer plan’s change custodians
This goes hand in hand with updating your contact information, as retirement plans must notify you that your assets are being moved from one custodian to another. This happens more often than you’d think. Employers change their plan providers from time to time, and if you didn’t receive notice of the money movement because they don’t have the right address, you might get an unpleasant surprise when you log into your retirement plan and see a balance of $0. Don’t worry – your money isn’t lost, but now you have to play catch up to figure out where your account is and how to gain access.
Simplifies your finances
Having accounts all over the place that you can’t readily access or stay up to date on can be a recipe for disaster. Consolidation reduces the clutter and allows you to have better oversight of your assets.
If you were to pass away, it could be a nightmare for your beneficiaries and the executor of your estate to deal with multiple custodians of multiple retirement accounts. It would require a visit to each custodian’s office to deal with how to settle your accounts. Since many people’s wills designate their surviving spouse as the executor, this can be a significant burden to someone who is mourning your loss.
For IRAs, you can take the aggregate of your required minimum distributions (RMD) after reaching age 70 ½ from one IRA or proportionally from all of your IRAs. 401(k)s are different because you’re required to take that account’s RMD out of it, rather than having the option to aggregate. If you have several dormant 401(k) plans, it can be quite a hassle to request a withdrawal from each plan. Also, if you forget to take your RMD, you’re subject to a penalty equal to 50% of your RMD that you did not withdraw by year-end.
Avoids having to move your assets if your balance is below $5,000
Many retirement plans have rules where if you no longer work there and your balance is below a threshold, such as $5,000, you must move your assets out of the plan by a certain date. If you don’t do anything before the deadline they give you (for example, a year from termination of employment), they will move your funds into an IRA by default, and you may not know whether these funds will be invested in a target retirement fund or sit in money market if you do nothing.
Be aware that plans often charge a termination fee of $50 to $100 when you move your assets.
If you’re deciding whether to consolidate a former retirement plan, we suggest you discuss your options with an advisor.
Here’s what generally happens when rolling over a former retirement plan:
IRS special tax notice
When you call to roll over your retirement plan, they’ll ask if you’ve read the IRS special tax notice. Your plan has a version of this notice specific to the custodian, such as Fidelity. The purpose of this notice is to ensure you’re aware of the options available to you with your retirement plan assets, and any tax consequences. In this article, we’re discussing a tax-free, trustee-to-trustee rollover, so there wouldn’t be any tax consequences. The notice lists your options, such as leaving the funds in the account, moving them to an IRA with the custodian or an outside custodian of your choice, rolling them to your current employer or withdrawing the funds for spending.
Keep in mind that if you request a check payable to you and not the new custodian, the custodian is required to do an automatic federal and state tax withholding. You may also be subject to an early withdrawal penalty if you are under age 59 ½.
Your employer’s retirement plan website
If you haven’t set up a log-in, contact the retirement plan provider, such as Fidelity, and request online access credentials. Your plan provider and their contact information should be listed on a recent statement. If you don’t have a recent statement or don’t know where the plan is located, contact your former employer’s Human Resources department.
Plans that private employers provide often don’t require paperwork, and withdrawal requests can be initiated online or by phone.
After you log in, search for a withdrawals section to see if they permit you to request a withdrawal (rollover) online. You may find that they do allow it, but that the online form can be used only to move the funds to a rollover IRA at the same custodian. If the 401(k) is held at Fidelity and your rollover IRA is at Charles Schwab or TD Ameritrade, then it doesn’t make sense to move it to an IRA at Fidelity.
403(b), 457 plans
Plans that public employers provide almost always require paperwork to initiate the rollover, rather than online withdrawal requests. A primary reason for this is that the plans have a section for spousal consent of the rollover, where the spouse needs to sign and then get their signature notarized. Fortunately, many plans allow you to fax the request, rather than mailing the original copy.
Often it makes sense to call the provider to have them prepare the paperwork for the withdrawal request. (They’ll either mail the paperwork to your home address or upload it to a secure message center.) However, when you tell them you want to withdraw funds, don’t be surprised if they transfer your call to an “asset retention” customer service group that temporarily gives you a much improved and interested customer service experience.
Receiving the funds
After the custodian/provider approves your withdrawal request, they’ll issue a check. About half the time, they mail the check to your address of record, while the other half of the time they mail it to any address of your choice (such as your advisor’s firm, current employer plan or IRA custodian). The provider/custodian should issue the check within 1 to 3 business days and send it either express mail or regular mail, so you should receive the check within 1 to 2 weeks of the request. If you receive the check, either give it to your advisor or deposit it at a local branch of the custodian.
We recommend that you speak with an advisor about your options so they can assist you with the rollover process and any necessary paperwork.
All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax or legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.
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Geoff has always enjoyed talking with people about finance, learning about their investments, financial strategy, and business sense. His interest only deepened with time, and what began as a hobby has now become a life-long passion, with an unparalleled passion for continuing education that makes him an expert in many subjects from traditional taxes and investments to business succession planning and executive compensation negotiations.
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