Our constant approach to serving physicians is education. In light of this approach, Physicians Thrive wanted to share some information regarding all the options for managing retirement plans from former employers.
Keep in the old 401k or Rollover into your new employer’s plan
- Each 401k provider has a “menu of investments” that participants can choose from. These are often anywhere from 5 – 40 different options. As you can see, there are a limited number of investment choices so you would be locked into the investment options that are offered.
- Sometimes, there are “Lifetime Funds” that are titled something like “Lifetime 2040 Fund” meaning that 2040 is the estimated year of retirement. While these fund are good because they will start out more aggressive the further away from the anticipated retirement year and reallocate to be more conservative as you approach retirement, the funds are a mixture that on average over the longer term earn approximately 5-6% before fees and expenses. The risk of these funds is usually fairly high early on. Alternatively, you can put together a diversified allocation with less risk while keeping the possibility of stronger returns.
- There are fees inside a 401k that you may or may not be aware of. Thankfully, in 2012 a law went into effect that required fee disclosure for employer sponsored retirement plans. While the law requires the fees to be disclosed, a lot of times, people aren’t aware that there are fees in their retirement plans through work nor do they know where to look for them. In order to understand the total fee structure, it is important to consider which, if any of the following fees apply: advisor fee, platform fee, strategist fee and internal fund fees.
- The above 3 points apply to rolling over the old plan to your new plan.
- Money left behind in a former employer retirement plan may be subject to additional fees that are no longer covered by the employer once termination has occurred. These fees are typically picked up by the employer as a benefit while employed. After termination, the investor is responsible and these fees can reduce returns.
Transferring the Old Account to an IRA
- This is typically the preferred approach.
- You have access to all investment options to choose from and are not bound by a limited “menu of investments.”
- There are fees associated with this approach depending on how much the advisor charges. Factors that should be considered when evaluating the fee structure should be overall return, risk reduction, service, and value gained from the advisor.
- Some advisors provide Holistic Financial Planning/Wealth Management if they are managing your account, regardless of size. This provides for clarity and confidence when determining strategies for both your short term and long term goals.
- If you desire, you can convert a portion or all of the account to a Roth IRA. This is a strategy that makes sense for some. Your personal situation and goals determine if this would help you save on taxes long term.
Taking the Money Out
- While this is an option, this is not recommended. You end up paying a 10% penalty on the amount that comes out of the account (unless you put it into an IRA within 60 days of the withdrawal) and you pay income tax on the entire amount (if it’s not post-tax money).