Retirement plan decisions made easy
Drill Down: Should You Keep Your 401k with Your Old Employer?
Keeping your 401k with your old employer is usually not a bad choice, though it’s often not the very best. However, if you have a lot of other things on your mind while you are changing jobs, don’t worry about leaving the 401k behind. You can move it later without any hassle. There is a good reason to move your 401k away from your old employer, but to understand it properly we need to learn some history. In the old days, like way back in the 1980s, companies set up 401k plans to keep their employees happy. Workers with 401k accounts change jobs less often, thereby saving the company money on recruiting and training costs of new employees. And you thought they loved you for your personality!
When these plans were originally formed, the company paid for the plan’s administration. That is, they paid some other company to keep track of how much each employee contributed, how much each person had accumulated in the plan, and to handle disbursements and rollovers. The cost of the administration isn’t huge, but it is an expense.
At the same time, different mutual fund management companies were trying to get the business of managing 401k investments. The various mutual fund companies would make the rounds to corporations saying, “Use me to manage your 401k funds, not him.”
Then one smart fund company got an idea: charge higher-than-average fees on their mutual funds and offer to cover the 401k administration costs. Making sales calls to corporations with 401k plans, their sales pitch is, “Use us and we will pay the administrative costs, saving you all of the money you are currently paying to administer your 401k plan.” The catch here is that the mutual fund companies could only afford to make that offer because they were charging higher fees to manage the mutual funds in the plan. Who ended up paying this higher cost? I bet you figured it out. No longer was the employer bearing the cost of administration—the costs were passed on to the employees through the higher mutual fund fees.
It’s possible that your old 401k plan is an old-fashioned plan where the employer pays to administer the thing—possible but unlikely. What is more likely is that you are paying above average fees to the mutual fund management company so that your poor old employer won’t have to pay. That was fine back when you worked there because the advantages of the 401k were great enough that you could absorb the higher fees. Now that you have left that employer, though, you are free—free to be cheap.
By rolling your 401k over into an IRA, you can get out from under the higher fees that your old plan probably paid to the mutual fund managers. That is why I recommend that you don’t leave your money at your old employer.
That stated, let’s keep this advice in perspective. Having some money set aside for retirement is very, very good. Getting the very best deal possible on managing the money is good, but it’s a relatively small issue.
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
» Lesson 6: Changing Jobs
Lesson 9: Your 401k, Your Other Assets, and Your Life
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