For many employees, what to do with their 401(k) plans after retirement is a foregone conclusion: roll it over.
Defined contribution plan advisors do not lose the opportunity to retain assets after employees retire, thereby reducing overall plan costs. In a 2021 Pimco survey of retirement plan advisors and advisors, 36% of companies said they are actively encouraging participants to stick with their plans in retirement.
If you're considering whether to leave assets or roll them over for retirement, here are the key questions, listed in order of importance.
What is the quality of a 401(k)?
This is a key question when deciding whether to keep an asset in the plan or roll it over. You should evaluate the quality of a plan based on three key metrics: the quality and breadth of the investment lineup, the investment fees for the fund options in the plan, and any management fees the plan levies on participants.
You can use Morningstar ratings and data to evaluate investment options, but if your plan includes collective investment trusts rather than mutual funds open to the public, you may want to do some additional research.
Do you need access to your funds sooner?
If you're a young retiree and need access to funds before age 59 1/2, keeping a 401(k) plan may be the most practical option, even if the 401(k) plan isn't that great. That's because 401(k) plan investors who leave their employer can access their assets early without penalty at age 55, while IRA investors can access their assets early at age 59.5. Before considering taking a withdrawal so early, make sure you have fully assessed the long-term sustainability of your portfolio.
Does the plan allow flexible withdrawals?
Some plans may not allow retirees to choose the investments they withdraw, instead requiring them to take a pro-rata share of all assets in the account. This lack of flexibility can be a major disadvantage for retirees who want to use withdrawals to help their asset allocation continue to align with goals.
Likewise, if the plan offers traditional and Roth options, participants may not be able to choose which account to withdraw from; distributions between the two account types may have to be made pro-rata.
Do you need creditor protection?
Legal protection is another reason to consider keeping your old 401(k). Although laws regarding creditor protection of retirement assets vary from state to state, company retirement plan assets are generally better protected from creditors and lawsuits than IRA assets. Obviously, these protections will be a greater consideration for those who have credit or bankruptcy issues or are in occupations where they may be sued.