The other day I heard a familiar saying on the radio…Those lazy, hazy days of summer. Lazy? I don’t know about your family but our household gets even busier during the summer. In fact, it can be quite hectic. The months of June and July are the busiest months of the year for movers, Realtors and families changing jobs or careers. When changing jobs, make sure you don’t forget about your 401(k) or other employer retirement plan.
Financial industry professionals call the process of moving your 401(k) money out of your employer plan into an IRA (Individual Retirement Arrangement) a “Rollover”. The IRS allows you one rollover per calendar year. According to the Wall Street Journal and Financial Research Corp., over $350 Billion will be rolled over into an IRA. Now that I have armed you with enough conversation factoids to easily impress your friends at a summer picnic or two, lets take a look at what you can do with your 401(k).
Know your options
Despite all the marketing and sales pitches some financial firms use to persuade you to rollover your 401(k), know that you do not necessarily have to take your money with you when you leave your old job. That might be a good thing if you are pleased with the performance of your investments. Depending on the size of the company of your previous employer, you may also find that the fees with operating the plan could be cheaper than your new IRA. Fees affect the performance of any investment over time and should be monitored carefully.
There are potentially a number of good reasons to roll your 401(k) money into a new IRA. The biggest advantage is often the number of investment choices available to you in an IRA. There are several thousand mutual funds, stocks, bonds available to investors in an IRA account. Often, many employer plans are limited to 10 or so choices. Depending on your employer and the financial prowess of the human resources staff, those 10 choices may in fact be not very good choices at all. In an IRA account you may have lots of choices…some IRA custodians will even allow the purchase of real estate as part of your investment portfolio.
Perhaps you did not leave your past employer on such a good note. Rolling over your 401(k) money allows you to make a clean break from that company. Many of us have held a number of jobs over the course of our working lives. What if your old employer goes out of business? Federal law protects most workplace retirement plans from bankruptcy so you will not loose your money. Yet, having worked with employees of now defunct companies, it is a lot easier to get access to your money when the company is still in business. Consolidating those old 401(k) plans can save you a lot of headaches at retirement by cutting down on paperwork and saving you from sorting through multiple statements.
Watch out for your money
Unless you are a financial wizard and have the time to manage your investments, you will probably want to seek the advice of a financial professional. Be careful about who you ask for advice. It is anticipated that more $1 Trillion could be rolled over from 401(k) plans in the next few years. There are more than a few in the financial industry that will see $$$ signs instead of your face when you mention a rollover.
The majority of financial professionals out there are sales representative and brokers that may or may not have your best interest at heart. They may receive commissions or bonuses for rolling over your 401(k) money. Seek out a Registered Investment Advisor who legally must act as a “fiduciary” or someone giving you advice that is in your best interest. A sales representative may only have to prove that something was “suitable” meaning you could possibly end up investing in something that is less that ideal for your investment objectives. Seek out an advisor that truly has your best interest at heart not the size of the commission.
Ask any advisor you work with to carefully explain all costs associated with the investment. And, do not be afraid to walk away if you do not fully understand in what you are investing. A reputable advisor will be more than happy to explain the ins and outs of any investment vehicle.
Don’t have a lot of money to rollover from your 401(k)? Make sure your financial advisor works with investors in your situation. You do not want to be the small fish in a pond of big investors…you will not get the attention you deserve. Just because you are not a millionaire does not mean you should not have access to quality financial advice.