What is the best thing to do with a 401(k) from a previous job?
A: Before moving your 401(k) from a previous employer, you should consider this:
• Will your former employer’s 401(k) plan help meet your strategic goals for retirement? Will the investments available enable you to design a portfolio that gives you the best opportunity to achieve your targeted rate of return, given your tolerance for risk, and at an expense that is comparable to what is available to you from other providers?
• Have the funds available to you performed at acceptable levels over holding periods of one, three, five and 10 years vs. their peer group? Are there options available that give you access to multiple funds in the same asset class if not?
• How does the cost compare to other alternatives available to you, such as an IRA? Don’t overlook the plan fees of a 401(k). Many small to midsize company plans force employees to pay for plan fees and administrative expenses. That with the internal expense and trading costs of a fund can raise the overall cost to you to the detriment of your long-term targeted rate of return.
• Diversification still matters. Does your former employer’s plan give you access to noncorrelated asset classes, such as commodities, emerging markets and high yield bonds that help you to minimize your short-term and long-term risk, reducing volatility, enabling you to “stay” in the market for the long term in order to achieve your targeted rate of return?
• Last but not least, if you choose to liquidate the portfolio/401(k), you will be subject to income taxes, and if you do so prior to age 59 1/2, you may be subject to an additional 10 percent penalty. If your former plan does not meet the above criteria, it may be time to move it. Be sure to speak with a certified financial planner practitioner to ensure the plan is suitable for you.
Robert L. Holland Jr. is a certified financial planner practitioner and a registered representative of INVEST Financial Corp with First Financial Strategies LLC in Denver.
