08/02/99

Looking at 401ks

I have the chance to speak before groups on a relatively frequent basis. One of the often asked questions is: “What should I do with the 401k plan I had with my previous employer?” “Should I keep the money in that plan; should I move it to my new employer’s plan or should I roll it over into an IRA?” Given that most people have the majority of their assets in retirement plans, this is an important question. Naturally, there is no one right answer, however there are specific issues for you to consider when making this decision. In this article, I will discuss the issues upon which you can make a wise decision about the retirement plan with your “old” employer (or soon to be.)

I refer only to a 401k plan throughout, but the same considerations exist if your former employer had a different type of plan such as a TSA, Profit Sharing, Employee Savings Plan, SEP, etc. It is common with some employers to only hold your retirement plan assets for a short time after your departure, taking away that option from you. Furthermore, some plans/companies do not accept assets transferred in from another plan. This is generally not the case, but if so, you will not have this option as well.

Investments: One of the first things to do is to look at the investments. In this regard there are two items of concern -- performance and choice.

• Performance - How has the old plan performed? Do not think that it has done well just because your money has grown over the last 3,5 or 10 years. Making the assumption of solid returns is not good enough because the markets have been good to most funds. You need to know exactly what the returns were for each mutual fund, fixed account and/or stock in the plan. Once you have that information you can then compare it to the historic results of your new plan and those of selected funds of your choosing for an IRA rollover. If the old plan has been a big winner, you may want to leave the money there. However, if you believe moving it would increase possible performance, it may be wise to get out of the old plan. Given that you have a wide universe of fund families to choose from upon rolling it into an IRA account, you can often find attractive alternatives with this option.

• Fund Choices - Some 401k plans have limited fund choices with as few as five funds to choose from. If your money remains in one of the severely limited plans, or if the new plan is not blessed with enough breadth of fund choices, you should consider the rollover option for maximum choice. While your plan may be doing well today, in a different market environment limited fund choices could prevent you from being properly positioned for maximum growth or income.

Control: Keeping the money in the old 401k plan or moving it to the new plan, leaves you subject to the rules, costs and restrictions of that plan. For example, some plans limit the number of times you can reallocate your portfolio during a one year period. If you do not find the rules/costs limiting you in any adverse way, then the old plan or the new one may be attractive places for your money. However, moving the money into an IRA Rollover account puts you in control and beyond specific plan rules. You have direct contact with your investment company and there is no employer and plan administrator standing between you and your investments.

Consolidation: Having statements from different companies and different plans can be hard to track. With varying statement formats it can be difficult to oversee your investments. Thus, consolidation argues for moving money into the new 401k plan. In this way all of you retirement assets are reported in one format in the same statement. If you believe you will have several job changes in your career, moving the assets into an IRA Rollover can also help with consolidation if you open all the rollover accounts with the same company.

Company Contact: If your former employer is a very large company with little chance of “folding”, being bought out, or moving to Sri Lanka, than you are probably not at risk of losing contact with the company and your money. Large companies with up-to-date computer systems and support will probably not lose your records and contact with you. This is not always the case with every company. Some companies get bought out and the headquarters move and somehow you or they lose contact. A few of my clients have told me about the old company they worked for in say Ohio, that they believe was sold to some other company ( they lost the record of the new name) and is now in Oklahoma. Now, for some unexplained reason, they do not get their 401k quarterly statements anymore, but the former employer still has the money. In transferring your assets to your new employer or an IRA rollover, you prevent the risk of losing contact with the old employer and having to track down your hard earned savings.

Roth Conversion: If you believe, as many people do, that tax rates over time only have one direction -- up -- than you will want to have as many tax free investments as possible when you retire. The Roth IRA gives you an opportunity to have a pool of money that you can access tax free after age 591/2. If you transfer your assets out of the 401k plan and into an IRA Rollover, you have the option of converting those dollars into a Roth Conversion IRA. At retirement you will have access to all the money you transferred to the Roth plus the growth tax free. Income taxes are due upon conversion, but for many individuals, particularly younger ones, it can be advantageous over the long run to convert. Unfortunately, this only applies to people with an adjusted gross income - AGI - of $100,000 or less (filing jointly or individually.)

In summary, there is no one right answer to this question for everyone. You must thoroughly understand your options, and determine what preferences are important to you. In doing so, you can make a wise choice about what to do with you “old” retirement plan money.

Please send questions or comments to dcoffin46333@wradvisors.com.