Should You Roll Over Your 401(k)?

Whenever you change jobs, the question arises: Is it better to transfer your former employer-sponsored retirement account to your new employer’s plan, or roll it over to your IRA, or leave it in the prior employer’s retirement plan?

No one likes thinking about this question!  But there it is, and like it or not, we need a good answer.

As background, some policy makers think the default answer is to keep the funds in an employer-sponsored retirement plan. Their reasoning is that employers provide investment oversight and have more bargaining power than do individual investors, suggesting that over time employer sponsored plans will be less expensive and will offer better investment options. Regulators for financial advisors tend to agree. They routinely ask us to justify any advice contrary to that default option.

Financial advisors, however, don’t necessarily agree with the policy-makers’ default opinion.  We see too many employer-sponsored plans with high fees and poor investment options.  We also work for some of the executives overseeing their firm’s retirement plan and notice that a.) They would rather focus on running their business, and b.) They are no more expert at investment oversight than any of our other clients.

As with many planning decisions, there is a range of considerations when deciding what to do with a retirement account from a prior employer. (NOTE: Employer-sponsored retirement plans include 401(k), 403(b), and 457 plans.)

The right choice is the one that matches your particular circumstances.

Here are the factors we think are relevant to consider when deciding what to do with your retirement account from a prior employer’s retirement plan:


Cost matters. It is a key driver of performance. It is important to consider which option is best for assembling a portfolio that is low in cost, e.g. where the mutual fund costs are less than ~ 0.30% per year.

Investment Options

Diversification matters. Sometimes an employer-sponsored plan will offer many fund selections, but quantity does not count as much as having a diversified selection. Are there low-cost bond funds with a range of average maturities and credit risk?  Are there low-cost stock funds allowing exposure to the full global market?

NOTE: Target date funds, i.e. the ‘one-size-fits-all’ funds with a stock allocation that declines with your age and thus presumably with your retirement date, are a common but problematic default investment option. Target date funds differ greatly from each other. It is not clear what you are buying absent a good look under the hood and consideration of how a particular target date fund will complement personal wealth beyond your employer-sponsored retirement account.

Distribution Options

Flexibility matters. Some plans, e.g. the federal government’s Thrift Saving Plan, are terrific in the accumulation stage of your financial life. They have well diversified and very low-cost investment options. But when it comes time to draw from your account, in the decumulation stage of your financial life, the distribution options are inflexible and do not serve the account holder well.  At retirement, you’ll want the flexibility to withdraw funds at times and in ways that match your cash flow needs. You don’t want a one-time, all-or-none decision, for example, about how much to annuitize.

NOTE: Government policy in this area is lagging best practice standards.  To date, it is a regulatory hassle and arguably also risky for an employer-sponsored plan to offer lifetime income options absent clearer safe harbor regulations. Yet best practices in retirement planning include consideration of, and likely use of, lifetime income strategies. Currently, it is easier to create lifetime income with IRA wealth than through your employer-sponsored retirement plan.


Plan details matter. If your goal is to consolidate accounts, check to see if the new plan allows funds to be rolled into its plan. (Unlike Rollover IRAs, employer-sponsored plans can refuse incoming transfers.) If your goal is to see your 401(k) as a part of your overall wealth, check to see that the account can be viewed by you through software such as and by your advisor through custodian daily data downloads or view-only software access.

NOTE: It is not uncommon that your advisor cannot see the details of your investment options without having the ability to assume custody of the assets, e.g. having the ability to change beneficiary designations.  In those instances, advisors must decline access to your account and will then necessarily not be optimally equipped to offer timely, pertinent advice.

NOTE: Similarly, Social Security considerations are fundamental to retirement planning but the government at this point does not offer access to your account without also giving the viewer the ability to change the deposit directions for your Social Security checks, i.e. without conveying actual custody of the assets.  It is also unlawful to grant access to your online Social Security account to another person. Lacking safe view-only access, your advisor must ask you for current Social Security statements in order to give proper Social Security planning advice.  What an odd situation.  It seems that in our culture we expect our elders to navigate Social Security on their own!


Your goals matter. Consolidation supports simplicity in your finances, which as advisors know, make it easier and therefore more likely that you will engage with your finances at the managerial, not clerical, level. Consolidation of accounts also facilitates consolidated performance reporting which can be important for overall retirement planning and distribution planning.  (Required IRA distributions can be taken from a single IRA; required distributions from multiple employer-sponsored retirement accounts, however, must be taken pro rata from each account.)  In contrast, keeping accounts separate is appealing when you prefer to diversify custodial relationships and/or to invest with a variety of mutual fund companies. Advisors note that, in general, as you age, having a streamlined account structure is safer and easier to navigate.

Tax Planning

Taxes matter—and they are always complicated.  Here are three examples:

NOTE: Alternatively, if you no longer work for the employer-sponsor of your retirement plan and because of your age are subject to required distributions, then you might want to roll out of your employer-sponsored retirement plan in order to avoid required distributions on the Roth portion of your retirement account.  (Required distributions apply to Roth 401ks but not Roth IRAs.)

Whew!  Got that?

Bottom line:

There are always trade-offs when you make a decision, and the decision of what to do with a retirement account from a prior employer is no different.

The typical tradeoff decisions advisors see most include:

Your choice in each case will vary with your personal preferences and your financial life stage.

As with the rest of your financial planning, don’t settle for one-size-fits-all rules of thumbs.

Take time to understand your investment options and their implied trade-offs, and then choose the option that works best for you.

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