Retirement Hacks: When to consolidate your 401(k) plans — and when not to

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Losing a 401(k) is easier than it seems — all it takes is a change in jobs, an exit from the workforce or a halt in contributions to put a retirement account in the back of one’s mind. 

Retirement tip of the week: In an effort to keep track of your savings and to make sure your investments are working for you until retirement, consider consolidating your accounts. 

“The older we get, the more we forget and the more difficult it becomes to retrieve these funds and keep track of what you have,” said Linda Farinola, a certified financial planner and partner at Princeton Financial Group. “Keep it simple.”  

There are many factors to consider before merging assets in a new retirement plan or rolling them into an individual retirement account (IRA). Workers should first see if they’re eligible for their new employer’s retirement plan and if that plan allows for incoming rollovers. 

“The Summary Plan Document (SPD) will tell you everything you need to know about your employer’s plan,” said Amie Agamata, a certified financial planner and Financial Planning Association Retirement Income Planning Advisory counsil member. “If the plan does allow for rollovers, then it may be best to review and compare the old 401(k) investment options and plan expenses to the new plan.” 

See: Thinking about borrowing from your 401(k)? When it makes sense to take from your retirement account — and when it doesn’t

What you’re paying 

Fees are one of the most important factors. Many 401(k) plans have administrative fees, or the investment options available may have fees tacked on. Advisers often suggest retirement savers look into what funds they have in their retirement plans, if they’re being charged excessive fees, as well as what additional charges they may be paying for (perhaps unknowingly). These fees should also be compared to any new plan’s potential fees.

What you’re invested in

Fund choices are also critical. “If the fees are low, we then consider fund selection,” said Chris Hardy, a certified financial planner and founder of Paramount Investment Advisors. “If the fund choices are good, or especially if the funds are closed to new investors outside the plan, it may make sense to keep the account there.” On the contrary, if another account may have more attractive investment options, investors may find extra incentive to move their money over. A rollover IRA with a large custodian will typically offer a “wide array of choices to align with your goals,” said Henry Hoang, a certified financial planner and founder of Bright Wealth Advisors.

There are times, however, when the original plan has better fund options, so it may make sense for some investors to keep their assets put. 

Also, if workers have appreciated company stock in an old plan, they may want to keep the stock in that account until they’re ready and able to distribute it, Farinola said. 

When you’re retiring

Timelines are also important. If a person is preparing to retire soon, he may want to combine everything in one account for simplicity, Hardy said.

“It is more practical to manage just one account,” Hoang said. Many investors will not actively monitor their accounts, regularly review them or effectively build a portfolio. When retirement assets are merged, however, they can also consolidate future savings from other retirement plans.

The age at which a person plans to retire will also play a role in this decision. For example, 401(k) plans have a penalty for distributions prior to age 59 ½ years old, unless employees are at their current employers with a plan and leave the job at or after age 55. People who fit into this category would be able to withdraw from their 401(k) without a penalty. 

“In many cases, an investor would want to keep the flexibility of having that age 55 rule in case they need access to the funds before age 59 ½,” said Adam Wojtkowski, a certified financial planner at Smith Salley & Associates. 

Consolidating accounts will also make it much simpler for the employee when it comes time to take required minimum distributions.

One reason not to consolidate an old and new plan: if the worker does not intend to stay in their current plan for long, said Marco Rimassa, a certified financial planner and founder of CFE Financial. 

Have a question about your own retirement concerns? Check out MarketWatch’s column “Help Me Retire” 

How much is in the account, and where 

The size of the account is yet another factor to weigh when considering consolidation. “For smaller accounts, it almost always makes sense to consolidate,” Farinola said. 

The size of the firm housing the money also matters, Farinola said. “If a company goes out of business, it can be difficult to track down your funds 30 or 40 years later,” she said. 

Some individuals, especially those with multiple retirement accounts floating around, may want to seek a financial planner who could assess their goals, retirement needs and whether or not their retirement plans should be consolidated. 

Nadine Burns, a certified financial planner and chief executive officer of A New Path Financial, said she had a client couple come to her with 16 different retirement plans after moving from job to job during their career.

“They had no idea what they had where, how the investments fit their risk tolerance or what they were even invested in,” she said. “When we did an analysis, most plans were holding identical assets, with very high correlation. The issue most people have when they leave a company is not monitoring their old plans, leaving them and forgetting them and not understanding how each fits into their overall retirement plan.” 

Want more actionable tips for your retirement savings journey? Read MarketWatch’s “Retirement Hacks” column