When leaving a job, most people automatically transfer, or roll, their 401(k) accounts to an individual retirement account. Now, some companies are urging departing employees to leave their savings right where they are – and there could be some good reasons for doing so.
When an employee leaves a job, he or she is generally free to roll 401(k) money into an IRA; such accounts typically offer a much wider array of investment options. But while most employers have historically encouraged departing employees to make transfers, a growing number of companies now say they’re eager to keep former employees’ savings within their plans.
As baby boomers start to retire, companies are realizing that participants with the biggest balances are going to be leaving the plan relatively soon, says Katharine Wolf, a senior analyst at research firm Cerulli Associates. When assets decline, companies have less leverage to negotiate with plan administrators and fund companies for lower fees and unique investment options, she says.
In considering whether to keep money in a 401(k), departing employees must consider a range of factors, including fees, investment options and whether they may need protections from creditors or early access to their savings.
Participants in some 401(k) plans may discover that it’s cheaper to stay put. Often, plans with assets of $100 million or more receive access to low-cost investment products, including collective trusts, which resemble mutual funds but generally charge lower fees. (To find out what you’re paying in investment and administrative fees, ask your plan administrator or go to BrightScope.com, which rates plans.)
A 401(k) plan also may offer greater protection from creditors. While federal law shields the assets in 401(k) plans from a variety of claims, it only safeguards IRA assets in cases involving bankruptcies, says Ed Slott, an IRA consultant in Rockville Centre, N.Y.
Some states, including New York, have laws that provide greater protections for IRAs. But that’s not the case in every state, cautions Mr. Slott.
After leaving a company at age 55 or older, a former employee also has leeway to take penalty-free withdrawals from that company’s 401(k) account. In contrast, those with IRAs generally must pay a 10% penalty on distributions taken before age 59[frac12], says Keri Dogan, a senior vice president at Fidelity Investments. (SMARTMONEY, MAY 11, 2011)