With hidden 401(k) fees back in the headlines, financial advisers say that in many cases it just doesn’t pay to leave your money in these plans—especially once you retire or switch employers. Recent findings from Demos, a research group, include this zinger: hidden fees may claim 30% of your savings.
That’s probably overstated. But it raises an interesting question: What are your options as they relate to this important savings account, which may represent the vast majority of your nest egg? For a sense of how hidden fees can zap your savings, check out this calculator.
There’s a lot to consider. For example, if you plan to retire early, leaving your 401(k) alone might be a good idea. These plans typically allow employees who leave work to make penalty-free withdrawals at age 55—four and a half years early. On the other hand, you’ll have greater investment choice and maybe lower costs in an IRA.
In thinking about where to stow your savings, keep in mind that a company match often is the most valuable aspect of a 401(k). If you are getting one, you should probably stay put. But the matching element disappears when you retire or move to another employer. Then, preserving tax-deferred growth becomes your main consideration. According to a report from mutual fund company T. Rowe Price, here’s how to look at your four primary options for 401(k) savings:
- Roll over the assets into an IRA This will maintain your tax-advantaged status and allow you to consolidate retirement accounts. You’ll get more investment options and likely fewer hidden fees. In some cases, you may be able to take penalty-free distributions at age 55. You cannot take a loan from your IRA, as you can with a 401(k). You’ll have to choose between a traditional IRA and a Roth IRA. In the first case, you’ll defer taxes until you begin taking distributions. With a Roth, you’ll pay taxes up front but enjoy tax-free growth.
- Move assets into your new employer’s plan This is relatively simple, and it preserves tax-deferred treatment and the ability to take a loan against your assets. But you won’t get a match on funds you roll over. Meanwhile, you’ll be back in a kind of plan that has been broadly criticized for hidden fees. In general, you’ll be better served if the new 401(k) plan sponsor is a large employer with leverage to keep costs down.