Clark Howard

What Should I Do With My 401(k) at My Old Company?

You're contributing to a 401(k) account and even getting a company match. As years go by, your balance goes up.

Suddenly, you change jobs. You realize that you’ll be starting over with a new 401(k) account with your new employer.

What should you do with the money in your old 401(k)?

What Should I Do With My Old 401(k) Account When I Switch Companies?

I have $30,000 in an old 401(k). What should I do with it?

That’s what a Clark Howard listener recently asked.

Asked Calvin in North Carolina: "I'm 27 years old and recently left a company that I worked at for almost eight years to start a new job. I have about $30,000 in my old job 401(k) account.

"What should I do with this account funds in this account? I understand the penalties for any early withdrawals. Is an IRA or mutual fund the right direction to go? What are all of my choices?"

The good news is that you almost always have options.

If your old 401(k) balance is less than $1,000, the IRS will allow the company (or the person or organization overseeing the 401(k) account) to automatically sell your investments, withdraw the money, take out 20% in taxes and send you a check.

Otherwise, you choose between five options:

  • Move your 401(k) funds to your new company's plan
  • Leave your money in your old company's 401(k)
  • Roll over your 401(k) to an IRA
  • Cash out your 401(k)
  • Roll over or cash out only a portion of your old 401(k)

Fees Dictate What To Do With Your Old 401(k)

Fees make a much bigger difference in your long-term retirement savings than many people realize.

Not sure where to start? Look at the fees of your old 401(k) plan. Clark wants the combined administrative and investing fees to equal 0.5% or less annually.

If your old plan meets that criteria, consider leaving it where it is.

“That would be usually where I’d start. Especially if the 401(k) that you have at the old employer is managed by Vanguard or Fidelity,” Clark says.

There’s an argument for moving the money to your new 401(k) plan regardless. Especially if the new plan is also through a low-cost provider.

Americans switch jobs much more often than we did a generation or two ago. Lost or “orphaned” 401(k) accounts are a huge problem.

And even if every company you’ve ever worked for continues to thrive, it can be at least a headache to track down the right contact person to eventually corral those funds perhaps decades in the future.

When Clark Wants You To Automatically Transfer Your Old 401(k) Funds

There’s one circumstance where Clark implores you to execute what’s called a “trustee-to-trustee” transfer. Essentially, he wants you to roll over your 401(k) funds to your new company or into an IRA if it’s in a high-fee plan.

“So Calvin, your employer that you recently left will send you a document written somewhat in English, lawyerese, explaining what your options are,” Clark says.

“If your plan administrator is any insurance company or any bank, I want you to immediately do the paperwork you’ll receive.”

Let's say an insurance company or bank does oversee Calvin's old 401(k). Assuming Calvin's new company offers a 401(k) plan with acceptable fees, he should move the old 401(k) funds there. If not, he can roll the funds into an IRA at Fidelity or Vanguard.

How To Invest Your Retirement Money

Calvin also seemed to ask how to invest those funds.

If you've listened to Clark for any period, you know he loves to recommend target date retirement funds inside of 401(k) and IRA accounts.

“You’re 27 [years old]. Put it in a target retirement fund for about Year 2065,” Clark says.

“And target retirement funds have extremely low costs and they handle all in one fund with your $30,000. They’ll allocate based on how far you are from retirement in a variety of stock fund kind of choices along with other things.”

Final Thoughts

Switching jobs and trying to figure out what to do with your 401(k)? First, check the fees of both plans. Choose the least expensive option if there’s a significant difference.

Assuming your new company offers a good 401(k) plan, you may consider moving your funds regardless. Just to avoid keeping track of multiple 401(k) plans for years to come.

You can roll over your 401(k) funds to an IRA if your old and new companies both feature retirement plans with exorbitant fees.

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