My case for getting rid of your old 401(k) (or 403(b)) can be summarized in one word: Cost. The structure of the 401(k) market place leads to higher costs, which then leads to lower returns.
401(k)s and IRAs look a lot alike- they are both places to make tax-favored investments for retirement. But if you dig a little deeper you’ll see 401(k)s have two major faults:
4 reasons 401(k)s are a lot more work:
- Every employer can customize their own, which is labor intensive for the employer.
- 401(k) providers must note the source of all contributions (employee deferral, employer match, profit-sharing, etc) and track them until the time of distribution.
- 401(k) plans require annual “testing” and annual reporting to the IRS.
- 401 (k) plans have high turnover as employees come and go. This means more phone calls, more paperwork, more problems, and so on.
In short, 401(k)s involve a lot of work, and more work means higher cost.
401(k)s don’t help you if you’re a former employee
Retirement plan costs are borne, in whole or in part, by plan participants in the form of higher investment costs. That’s usually okay if you are an employee who benefits from the plan. As an employee, you are able to defer money from your paycheck, and you might be entitled to matching contributions from your employer. But when you become a former employee, all of the benefits disappear, and only the costs remain.
So what do I recommend?
Ditch the 401(k) and move your old retirement plan to an IRA. With the help of a financial advisor, you can replace the 401(k) cost with a retirement option that will actually benefit you: in other words, the cost is the same, but you’ll be working with an advisor who will be working for you. Or if you prefer to go it alone, you can move the money to a low-cost investment provider. There is no 401(k) investment strategy that cannot be replicated closely, if not exactly, at the Vanguards or Schwabs of the world. Your retirement money can be self-managed (or is it ignored?) in an IRA just as it can in a 401(k), and very likely at a lower cost to you. Either way, you are better off.
Here at McNamara Financial Services, we can help you make the best choices for your retirement plans. If you need help with your old plan, want to start one, or would just like more information, please contact us and schedule an appointment soon.