This week we’ve been helping a client roll an old 401(k) into her new plan with her current employer.  In case you need a refresher, there are four options for your 401(k) — or other qualified plan — that you have when you leave a job:

  1. Leave it in the old company’s plan.  You can’t make contributions, but if it’s a defined contribution plan (like a 401(k)), you’ll be able to choose the investments on an ongoing basis.  
  2. Roll the old plan into a new plan at your new employer.
  3. Roll the old plan into an IRA.
  4. Take a distribution (penalties and taxes may be applicable depending on your particular situation).

Your contributions to the plan and any matches that you received under a Safe Harbor provision are always 100% vested — the money is yours.  Other contributions made by your employer on your behalf may be subject to a vesting schedule.  It’s important to understand this schedule because you may be leaving money on the table if you can control the timing of your job change.  That’s not to say waiting on contributions to vest should drive your decision, but rather that you should be aware of all of the variables that are at play.

Your decision to execute one of the aforementioned options should be based on some research.  If your old company’s plan has a good investment mix, you can access the participant site easily, the fees are low, or has some other compelling feature that “beats” rolling into your new employer’s plan, then maybe that’s the right option.  Or maybe you’d like comprehensive financial planning and advice that comes with working with an advisor, so rolling the balance into an IRA that the advisor manages looks like a good value-add.  Whatever your decision, make sure you think about the various courses of action as you prepare to leave your current employer.  It won’t be the most important thing you do during the transition, but it will save you some time and headache down the road.

There are generally two parallel processes that need to occur when rolling an old account into a new 401(k).  First, the new plan administrator needs to verify that rollovers are accepted into the plan.  Sometimes, option 2 is automatically removed because the new plan doesn’t accept rollovers.

Second, instructions are sent to the old custodian (the company that actually holds the 401(k) funds in an account) to transfer funds to the new custodian for the benefit of the participant.  It’s basically analogous to telling Fidelity to take the money in your old 401(k) account, write a check to Schwab — where your new 401(k) is custodied — and put “for the benefit of John Smith, participant of XYZ Corporation 401(k)” on the check.  Boom.  Funds are deposited into your new 401(k).

At some point before you leave your old company (and assuming you’ve made the decision to do anything other than leave the 401(k) where it is), you should download or print off a distribution request form.  You don’t have to do anything with it right now, but you can at least retain it for your records and make note of who at the old company — if anyone — needs to sign it.

Important data to keep for your records:

  • Old statements and full account number
  • Contact information for the old plan administrator (or a direct line to the employee benefits section)
  • Contact information for the advisor who serves the plan (if the plan uses an advisor)
  • Contact information for the recordkeeper and custodian (all the players involved in running the plan)
  • Participant website login and password information

The last thing you want to do is leave your 401(k) behind and not manage it according to your financial plan.  Add this to your job-change checklist to make sure you’re protecting a (potentially) large part of your retirement nest egg.  And rely on the expertise and help of a fee-only, fiduciary financial advisor to help choose the option that’s right for you and keep your finances squared away.

Finally, if you haven’t started on the Targeted Wealth Solutions Do-It-Yourself Financial Plan, check out part 1 here and get to it!

The information presented here is for informational purposes only. This document is not personalized investment advice or an offer to buy or sell securities. Targeted Wealth Solutions LLC does not provide tax or legal advice. Hyperlinks connect to other content that we believe to be from reliable sources. Targeted Wealth Solutions LLC is not responsible for the accuracy or content of outside information or links. The views expressed on external sites are not necessarily those of Targeted Wealth Solutions LLC.