The Wall Street Journal: Leaving a 401(k) behind at your old job might not be such a bad idea

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The days of working for the same company all your life, contributing to their pension plan and having a worry-free retirement are long gone. Most companies no longer offer old-style pensions and employees no longer stay with the same company their entire career.

According to the Bureau of Labor Statistics, today’s worker holds an average of 12 different jobs before reaching age 50, and this number is projected to grow. Rather than pensions, most companies offer a 401(k) plan, so employees are increasingly faced with this question: What should I do with my 401(k) when I switch jobs?

Years ago, the decision was easy: You rolled over your 401(k) plan to an individual retirement account (IRA) at a discount brokerage company. That was because of the much wider availability of investment choices in lower-fee IRAs. It was a slam dunk.

But in recent years, I have noticed in my practice that the 401(k) plan investment choices have improved as companies have made their fund lineups more compact and added low-cost index funds. More important, the fund fees have continued to go down. A 2016 study published by the National Bureau of Economic Research projects that participants in plans that have streamlined their investment choices could save in excess of $9,400 in fees over the next 20 years. I regularly receive notices about funds shifting to a lower-fee institutional share class and the elimination of many high-fee active funds. These are welcome changes, of course, and I expect this trend to continue.

Because of these changes, IRAs aren’t always the default for this savings any more. It might be advantageous to leave that 401(K) with your former employer. To make an informed decision, you should compare your current 401(k) with your rollover options, looking at fees, the quality of investment options, quality of service providers and how these options fit into your long-term financial planning and investment goals.

Here are three questions to think about when you’re considering leaving your retirement funds in a 401(k) with a former employer:

1. Can you replace the fund choices for the same expense?

A large employer with sizable assets may have a plan that has access to low-cost “institutional” funds that may not be available to individual investors. As mentioned, 401(k) choices have improved and many include low-cost index funds. While you could probably find similar funds in an individual IRA, it might come with a higher expense ratio. There are rare cases where a former employer’s plan simply beats the new employer’s plans, such as is sometimes the case for people who formerly worked for the Big Three auto companies. One of my clients has kept his 401(k) plan because it has proprietary index funds that were so cheap, it made sense to keep them intact.

2. Will you ever wish to borrow money from your retirement funds?

Most 401(k)s allow participants the option of borrowing against their savings without penalty or tax implications. When you transfer the funds to an IRA, this option disappears as you cannot borrow from an IRA. Your 401(k) can provide you with a backup if you are ever in need of short-term cash. Of course, you need to check with your plan administrator to see if this is an option as not all 401(k) plans allow participants to borrow. I never advise clients to plan on borrowing from their retirement funds, but occasionally the option is important to have available.

3. Are you at high risk of litigation or concerned about creditors?

Another reason to consider keeping your 401(k) plan is that 401(k) accounts are generally protected from creditors—except the IRS and your spouse—and IRAs are not (only the first $1 million is protected in bankruptcy depending on your state).

If you do decide to leave the money with your former employer, you will no longer be able to contribute to it and it becomes another account that you need to manage. You may be charged extra fees by the plan administrator and only allowed a set number of investment choice changes because you’re not a current employee. And if you have less than $5,000 in the account, your employer has the option of cashing you out of the plan, which would mean you pay taxes and penalties.

Having said all that, when the reasons and costs are transparently laid out, for most of us it usually does make more sense to rollover the funds into an IRA as that provides consolidation, more choices and lower investment fees.

What’s more, most people like a fresh start when changing jobs and moving your 401(k) allows you to cut the last string to your previous employer in addition to simplifying your life by eliminating yet another investment account you need to attend to.

George Papadopoulos (@feeonlyplanner) is a fee-only wealth manager in Novi, Mich., serving affluent individuals and families.

The article “Why You Might Want to Leave a 401(k) With a Former Employer” first appeared on WSJ.com