Combining your old 401k with your new 401k feels right.
Keeping all of your 401k money together will be easier to track.
But it’s actually the third worst thing you can do with your old 401k.
The worst decision is to take the money and run which results in up to 50% of taxes and penalties. Most people know not to do this.
The second worst decision is to leave it at your old 401k (if they let you). That’s how money gets lost. Trust me, I’ve seen this many times.
The THIRD worst option is to roll over your old 401k into your new 401k?
Why? 2 reasons: the fees and the investments.
THE FEES
Your 401k is not “free”.
All 401k companies, from the big dogs like Fidelity to the small fish like Guideline charge you administration fees.
These fees range anywhere from 0.50% on the low end to 2.0% on the high end.
How can you find yours? Look at your disclosure documents. It’s called a 404(a)(5) disclosure form.
Since 2012, it’s a legal requirement that they make these fees available (but you still have to ask for it).
There are also investment fees related to the funds you choose. They’re called expense ratios and can range from 0.04% to 1.5%+ per year.
THE INVESTMENTS
401k’s are great for saving and terrible for investing.
I’ve looked at hundreds of 401k plans over the last 15 years and I can unequivocally say, the mutual funds that you have to choose from are A W F U L.
They’re not good and they’re expensive.
Thankfully, there’s a 401k trend reduced this problem. Self-directed brokerage 401k’s allow you to invest in more or less anything you want.
Unfortunately, only about 50% of 401k’s offer this option.
Lastly, any fund you can buy in a 401k is also available to purchase in a Rollover IRA which will avoid those nasty hidden fees…
SO WHAT SHOULD YOU DO?
99 times out of 100, you’ll want to roll over your old 401k into a Rollover IRA. And every time you leave a company, consolidate all of your 401k’s there.
(Big companies like Fidelity make it really, really easy to roll over your money into a Fidelity Rollover IRA.)
It’ll be cheaper, just as easy to track and you can invest in the same funds you can in a 401k.
One reason NOT to do this is that 401k’s are protected from lawsuits and IRA’s are not. So if you plan on getting sued, then by all means keep your money in 401k’s.
But having a personal umbrella liability policy mitigates that risk, so if you’re financially adulting this should be an issue.
With lots of people in job transitions this year, there will be a lot of 401k’s “in motion”. The sooner you roll it over into an IRA, the sooner you reduce the fee drag on your money.
