By Stephen Kyne
Whenever someone leaves a job, whether voluntarily or not, one of the biggest questions they face is what to do with their 401k, 403b, or other company-sponsored retirement plan.
Some people are tempted to leave the account as-is, while others are tempted to move it over to the plan at their new employer. Both are often not the best choice.
As a participant in a company-sponsored retirement plan, you are just that – a participant. You are not the owner, which means that you are limited in the control you have over your hard-earned assets. Plan participants are subject to the rules of the plan, which can be very limiting. Investment choices, distribution options, cost structure, and trading limitations can all restrict the ability of your assets to meet your objectives.
Consider the investment choices in your plan. Many times you will find that they are all from the same company, or a handful of companies, and you may only have one or two investment choices for each market sector.
This can cause serious problems. For example, if all of your bond
choices are interest-rate sensitive, how can you properly diversify in a
Compounding the problem of limited investment choice, your plan may also
have restrictions on how you allocate your funds, and how frequently
you can change your allocation. If the market changes tomorrow, and
you’ve hit your trading limit, what’s your plan for protecting your
Until recently, your employer and plan administrator did not have to
disclose the full extent of the fees you were paying in your retirement
plan. A rule change in 2012 meant that, for the first time, employees
could see exactly how expensive their retirement plans were.
Do you know how expensive your plan is, and what you’re getting for
This isn’t to say that your employer-sponsored plan isn’t a good place
to accumulate assets while you’re working. In fact, it is often the most
convenient place to save for retirement, especially if your employer is
offering a match on your contributions.
It’s also likely that your plan has provisions to allow for a loan, in
the event you need to borrow against your account. However, as soon as
you’re eligible to roll assets out of the plan, you should seriously
consider doing so.
When can you move assets out of the plan?
Typically when you separate from service (i.e. you retire, or are let
go). Often if your plan provider changes, or if your company is
acquired, you may have the option to roll your assets to the new plan,
or to an IRA. You may also be eligible to distribute assets while you’re
still working, if your plan allows for an in-service distribution.
Eligibility for in-service distributions will be outlined in your
Summary Plan Document (ask HR for your SPD).
Once you’ve rolled your assets to an IRA, you’ll enjoy the benefits of
being an owner, rather than just a participant. You’ll have a virtually
limitless choice of investments, with far fewer restrictions, and much
greater control over the cost of your investments.
So, why doesn’t everyone roll their plan assets to an IRA? Most people
either don’t know they can, or don’t understand how. If you’re in either
of these camps, you should consult your financial advisor.
The process is far simpler than you probably think, however because you
may only have to go through it a few times in your life, it can seem
challenging. Your financial advisor should understand the process, and
likely helps clients manage rollovers on a daily basis.
Please keep in mind that rolling over assets to an IRA is just one of
multiple options for your retirement plan. Each of the following options
has advantages and disadvantages, which should be understood and
â€¢ Understanding your options.
â€¢ Leave assets in a previous employer’s plan, if it is allowed.
â€¢ Roll over the assets into a traditional IRA or a Roth IRA.
â€¢ Move the assets into a new employer’s plan, if it is allowed.
â€¢ Cash out, or withdraw the funds.
When considering rolling over assets from an employer plan to an IRA,
factors that should be considered and compared between the employer plan
and the IRA include fees and expenses, services offered, investment
options, when penalty fee withdrawals are available, treatment of
employer stock, when required minimum distribution may be required and
protection of assets from creditors and legal judgments.
Kyne is a partner at Sterling Manor Financial in Saratoga Springs.
Photo Courtesy Sterling Manor Financial