lots of money

Many people have old “orphaned” 401Ks with previous employers and wonder what to do with them. I personally had two, which isn’t that many compared to some. I read the pros and cons of leaving them at previous employers vs. rolling them into a single plan and it seemed to be a wash. Not wanting to go through what I thought would be massive piles of paperwork to roll them over, I left them alone (i.e., I took the “lazy” option) for a long time. But, after a recent experience, I decided to take the plunge and roll over my old 401K’s into a personal IRA. Here’s how it went.

My Story

I only had two 401Ks at previous employers. That wasn’t so bad, I thought, so I left them there for years, out of sight and out of mind. Then one day, I decided to check the balances (which I only do a few times a year), and I was horrified to find that one of them had a balance of zero dollars! Over a hundred thousand dollars of my retirement savings gone!!!

After a frantic call to my ex-employer’s HR department, I found out that they had switched plans without informing me and that I would be “receiving something in the mail” about it. I was relieved when I received the info in the mail a few days later, but it got me thinking. As an ex-employee, I was really a second-class citizen to them at best, and at worst, an annoyance.

Reasons to Roll Over Your 401K’s

I always thought that having my money in my ex-employers’ plans was advantageous to them, because it would give them more bargaining power and perhaps lower fees. But really, I was just a source of more work for them. That brings me to the first reason you might want to roll over your old employers’ 401Ks.

Your Ex-Employers Don’t Want the Hassles

According to this article, “roughly 60% of plans are ambivalent about or even averse to keeping former employees in the plan, according to the GAO analysis of surveys of plan sponsors and asset managers”. Do you want to have your money held and protected by someone who doesn’t really want to do it? I am not slamming on my ex-employer. I can’t expect them to be caretakers of my retirement. They are in business to make money, not care for ex-employees!

So, this is my first big reason for moving orphaned 401K’s: your ex-employers might not want them. Furthermore, they can move the money to different investment companies without informing you.

Shaky Companies

What if my ex-employer had gone bankrupt? There would be no one to call and I’d have to do some detective work to find my money. Not something I want to do. So, another reason to roll over is risk.

Simplicity

I only had two previous plans, but that meant two more accounts to check on every so often, two more sets of paperwork at tax time to deal with, two more addresses to change every time I moved, and so on. How many orphaned plans do you have? Checking on my old 401Ks is not a favorite activity of mine, so I really wanted to minimize all of this paperwork.

It’s Easier to Move than You Think

One of the reasons I didn’t move my money is that I dreaded the legwork. I envisioned repeated phone calls to my previous employers (who I didn’t really want to talk to) and tons of paperwork to fill out. I didn’t want to deal with it.

But, I already had an investment firm for my personal investments, so I made an appointment with them, hoping they could help. It was way easier than I thought it would be. I just brought my 401K account info, and they did the whole transfer from both previous plans while I waited. They made the phone calls to my old plan administrators and arranged the transfer of funds directly into my personal IRA or to me by check, after which I would deposit it into my IRA.

My only caveats here is that if you need to get your funds by check, your money will be “out of the market” for a period of time. This could be a good or bad thing. In any case, don’t plan to do the transfer while you are travelling or otherwise unable to get the check and quickly deposit it back into your retirement account.

New Employer 401K vs. Personal IRA

One question that is bound to come up is whether to transfer the funds to your new employer’s plan, or to open a personal IRA for the money from all of these old plans.

One argument for opening a personal IRA is that administrating 401K plans is probably pretty low on your current employer’s priority list. Transferring from old plans to their plan might not be something they’re good at, and they might not be willing to call all of your ex-employers to transfer the funds at all.

I had a great experience when I transferred, because it was done at a financial expert who does it for a living, at an investment company who was happy to get my money.

With a personal IRA, you also get more investment choices (which can be a pro or a con, as I will discuss below).

On the other hand, if you move your money into your employer’s 401K, you will get to take advantage of any lower mutual fund fees they might have negotiated.

Some Reasons to Leave Your Money in Previous Plans

There actually are some valid reasons to leave your money in your previous employers’ plans.

Lower Fees

The biggest reason I see to leave your 401Ks with your old employers is lower fees. If your employer had a large number of employees, they probably negotiated lower institutional fees for various mutual funds and so forth that you won’t get to take advantage of in a personal IRA. In my case, this amounted to around 0.1%, but it could be significantly more depending on the mutual fund. While I hated to pay this extra amount, I thought it was worth the lower hassle and more control I would have.

Ability to Borrow

Another reason is that some employer’s plans allow you to borrow against your 401K. I have never done this, so it didn’t make a difference to me, but it might be a handy feature for you.

Less Flexibility

By this I mean that employer 401K’s generally have a more limited set of investment options. What? How can this be a benefit? Well, having your money in such a plan will force you to keep it in traditional, relatively safe investments like mutual funds, as opposed to playing the stock market, for example.

Here is one other thing: once I moved my money into my personal IRA, my investment advisor tried to pitch all sorts of investment “products” including an annuity and some high-fee investments that I ultimately rejected or had to undo once I did more research on them. These firms get money from fees and transactions, so that is what they will try to get from you. Personally, I just wanted a good index fund reflecting the market, along with a bond fund and an international fund to balance things out. My advice is to keep it simple. Once you get full control of your funds, there is the possibility of doing something unwise with the money, and sometimes this is encouraged by your own investment adviser (who wants to make money on fees), so beware! With more power comes more responsibility.

The Bottom Line

So, that’s my story. I will have only one set of retirement fund paperwork to deal with after this year, and it’s much easier for me to see at a glance where my retirement money is. Rolling over was not as hard to do as I had feared. So, if you have a lot of old 401Ks and don’t want to deal with the paperwork, then I would recommend rolling them over into a single IRA (or your current employer’s 401K, if they allow it).

On the other hand, if you don’t mind the administrative paperwork of maintaining previous employers’ 401Ks, then you will have the benefit of slightly lower fees by leaving your money with them, and you won’t be tempted to do something rash with the money.

Please give your thoughts on this! Did you move your money into a personal IRA? What was your experience like?

Note that I am NOT an investment professional! I’m just a guy who went through the process I described. Every person’s situation is different. For real financial advice, talk to a financial advisor! – Brian

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