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Why It's Important to Rollover Your Old 401(k)

This week, a long-time friend of mine announced that after 43 years, she was finally prepared to set sail on the next phase of her life and retire from the only company she has ever worked for. 43 years!!!! That is a lifetime, or more, for many who are reading this article right now. Think about this — in the time that my friend was with her company, we have had eight presidents, six economic recessions, and the median household income has doubled, TWICE, and then some.

It seems almost impossible to imagine, doesn't it? But that was the way of the world for a long time. You find a job, you work there for your whole career, and you retire with a pension. In this regard, things have certainly changed. Nowadays, fewer than 7% of large employers who offered pensions to new hires 15 years ago are still offering those pensions to new hires. And frankly, why should they? Pensions used to be a reward for time served with a company. But today's workforce doesn't plan to stay somewhere for their whole career. In fact, according to the Future Workplace Multiple Generations @ Work survey of 1,189 employees and 150 managers, 91% of people born from 1977-1997 expect to stay in a job for less than three years. That is 15-20 jobs over the course of their working lives!

With 401(k) or 403(b) plans having replaced pensions for most of today's workforce, and the relative likelihood that the job you are in today will not be the job you are in on the day you retire, the reasons have never been stronger to ensure that your retirement dollars are consolidated into one place. After all, you could end up with 3, 5, or even 10 different accounts, depending on how often you move jobs.

Now I know what you are probably saying: "Why can't I just roll it over to my new employer as I move around?" Well, you can, but for many it is not the best strategy. I address that and more below. Here are four reasons why an individual IRA is the best place for your old retirement accounts.

1. You are in control. When you leave an employer, the vested amount you have in your retirement account is yours. That is true. They cannot take it back. But what they can do is change plans, change plan providers, or make other changes that you are subject to as long as the funds are inside of that plan. Not to mention, if you need to go back to your employer years later to gather information on the account, there may have been personnel changes, policy changes, or other company actions that make it more difficult to get accurate information. Rolling over your old 401(k) into an individual IRA gives you the cleanest break with your old employer, and keeps you in control of where the money goes.

2. Employer-sponsored plans have limited options. Virtually all companies that provide 401(k) and 403(b) plans limit the investment choices that the participant has in terms of investing. Most of the time, people choose Target Date Funds, which are designed to decrease in volatility as you get closer to retirement. While those funds are often good choices for active participants (meaning, while you are still at the company), why limit your options for funds you are now free to invest elsewhere? An individual IRA can hold anything from cash to specific stocks, to different sectors, to things like socially responsible investments. Your financial advisor can help design a personalized plan that meets your goals and objectives, and is not just the option being offered to the masses.

3. Cruise control doesn't work. Going off of what I said in #2, if you are using a pre-designed fund for all of your retirement dollars, then you are not providing yourself with sufficient diversification. Sure, your portfolio will be diversified in stock funds and bond funds, but it will all be based on an old way of thinking and on how close you are to retirement, not on what is actually happening in the market place. Keeping your retirement dollars in an IRA will allow your advisor to make changes as changes happen. They will be able to switch funds, move sectors, stay ahead of the curve — instead of just reacting to the steepness of that curve. Cruise control works if you want to stay in the same direction at the same speed. Unfortunately, we do not live in an economic environment where that method will breed success.

4. More beneficiary control. Beneficiary designations can seem like something of not much significance. However, in the event that an individual passes away, they become set in stone, and any planning you wanted or planned to do is lost. With many (although not all) 401(k) plans, beneficiary designations are limited. Spouse, then children, or something of the like. With an IRA, you can customize these designations. If you are a single parent, you can leave assets in trust to your children. If there is a reason why you want your sister to be the beneficiary as opposed to your spouse, go for it. While in most cases the limitations that some 401(k)s have here are not an issue, they can become an issue. Again, for your current 401(k) you play within the rules with these limitations. But why put limits on funds when you don't have to?

As I write this, I am more than aware that there are those who would say, "Aren't 401(k)s more protected from creditors than IRAs?" or "Don't I lose some options in terms of early withdrawals when funds go into an IRA?" The answer is yes to both. Which is just a reminder that every situation should be evaluated on an individual basis. That said, in general, if you are under 55 and have old employer sponsored retirement plan dollars sitting out there, now is the time to contact your advisor, set up your IRA and let your retirement money work for you in the most effective way possible.





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 Securities offered through American Portfolios Financial Services, Inc. Member FINRA/SIPC (FINRA/SIPC). American Portfolios Financial Services, Inc. and American Portfolios Advisors, Inc. are not affiliated with any other named business entities mentioned.

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