A 401(k) account is a valuable retirement resource, but deciding what to do with it when leaving an employer can be a daunting task. For many years, the best action was to roll over the account to an IRA, but that’s no longer the case. A recent study from J.P. Morgan found that three years after retirement, about 42% of participants still had their money in the employer plans, a significant increase from 10 years ago. This trend suggests that people are reconsidering their retirement decisions and exploring alternative options. Several factors have contributed to this shift. Employers and the financial firms that administer their plans have changed, making it easier to communicate with former employees. Regulations, such as the Department of Labor’s IRA rollover regulations, have also been updated, and the Securities and Exchange Commission has tightened its rules. These changes have led to a decrease in the number of financial advisors providing advice on IRA rollovers, as they are no longer seen as necessary. As a result, individuals are taking a more active role in making their own decisions about what to do with their 401(k) accounts. So, what are the options? A departing employee typically has four choices: leave the money in the 401(k) plan, transfer it to a new employer plan if available, take a lump sum distribution, or roll over the account to an IRA. Assuming you’re retiring, transferring the money to a new employer plan isn’t an option. Taking a lump sum distribution can be a good idea if the 401(k) holds appreciated employer stock, as it allows for a special tax break known as net unrealized appreciation (NUA). However, for most retiring employees, the choices are to stay with the 401(k) plan or roll over the account to an IRA. To make this decision, you need to examine the features of the 401(k) plan.

Examining the Features of the 401(k) Plan

Most 401(k) plans have improved significantly over the years, but many still have drawbacks. At small- and medium-size employers, plans may not be as attractive on their own. To determine if a 401(k) plan is suitable for you, look for the following features:

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• Low expenses: The plan’s annual fee, often called a maintenance, recordkeeping, or administrative fee, should be low. You can find this information in documents issued by the plan or on its website.
• Reasonable investment fees: The investment funds offered by the plan should have low fees and expenses. Some employers may invest in institutional shares, which charge the lowest fees of any share class.
• Other expenses: There may be additional expenses, which are also disclosed in plan documents or available on the plan’s website.

Many employers, especially large ones, work hard to reduce plan costs, such as investment management fees. They may also subsidize other costs, like recordkeeping and administration fees.

Investment Options

A good 401(k) plan should offer more asset classes than the basic five or fewer offered by some plans. The funds should also have consistently good long-term performance compared to similar funds. Some 401(k) plans offer funds from different investment management firms, while most funds are from one firm. What matters is that the funds deliver good performance for reasonable fees. On the other hand, most IRAs allow you to invest in almost any publicly-traded security or fund, plus some other opportunities. You may prefer this to the limited menu of a 401(k) plan.

Comparison of 401(k) and IRA

When deciding between an IRA and a 401(k), consider the following factors:

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• Investment options: Compare the number and quality of investment options offered by the 401(k) plan and the IRA.
• Annual fees: Check the annual maintenance or administrative fee for the 401(k) plan and the IRA.
• Transaction fees: Look at the list of fees for transactions such as distributions, rollovers, and issuing checks.
• Flexibility: Consider the distribution options for both you and a beneficiary, as well as any restrictions on changing investments or taking money from the plan.
• Communication: Think about how easy it will be to communicate with the 401(k) plan after retiring.

Ultimately, the decision to stay with a 401(k) plan or roll over to an IRA depends on your individual needs and preferences.

Conclusion

Choosing the right retirement vehicle can be a complex decision, but by examining the features of the 401(k) plan, considering investment options, and comparing the alternatives, you can make an informed choice that suits your needs. Don’t hesitate to seek professional advice if needed, and always prioritize your financial security.