Photo credit by Jippaflippa
Once you have left a company, whether involuntary via a layoff or to transfer to a new job, a wise action is to transfer your 401K account from the old employer to a Rollover IRA as soon as possible. Please note, I am not saying cash out and go to Vegas.
Here are some reasons and real life examples why a 401K shouldn’t be neglected.
- Control – A 401K has a limited number of mutual funds that you are allowed to invest in. In some cases, you are restricted to the same funds family because of the custodial company that the employer chose. Not all 401Ks provide enough choices for a diversified portfolio. Some 401K do not even have a cash or fixed income option.At an old employer, my only investment choices in my 401K were company stock and six mutual funds managed by my employer. Four of these were not well managed. I had no choice of a fixed account to temporarily park my retirement savings if I had wanted to sit out an anticipated slowdown in the market.
Nothing changed with the plan for decades since I was probably the only person out of thousands of employees to complain about the 401K investment choices.
Transferring the retirement balances out of a 401K puts you in charge of your retirement and gives more investment choices ranging from:
- stocks
- bonds
- mutual funds
- managed accounts
- alternatives
- CDs
- TIPS
- Treasuries
- ETFs
- futures
- commodities
- real estate
- annuities and many others
A friend of mine recently cited his reasons to stay in his 401K as: “The market is down and I don’t want to miss any run up so I am not doing anything and staying in there for a couple of years.” If your account is down, it is even more critical to give yourself the freedom to choose the best investments out there and capture the upside. Your chances of recovering from a loss is better if you get to pick from the best of thousands of options instead of a handful of mutual funds.
Why would you stay and handcuff yourself?
Coming next: 7 Reasons to Dump Your 401K After a Layoff Part 2 – COSTS
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There are not to many good reasons to keep your old 401k. The one I can think of is those over 55 but less than 59.5
Hi Daddy Paul,
There are a couple of reasons that may make sense for people to retain their 401Ks such as bankruptcy protection.
A lot of people who get lazy and hang on to their 401K for years (the worst I’ve seen is 18 years). I see this situation all the time. Ironically, the worst offenders are bankers. I’ve talked to finance professionals who have not touched their 401Ks for years.