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If you have a few 401(k)s from old jobs lying around, should you be consolidating them into your current 401(k) plan? There are definitely advantages to combining these accounts, but you’ll want to make sure you’re merging into a good plan by avoiding excessive fees and limited investment options.
Why consolidate?
One of the biggest benefits of a 401(k) plan is employer matching, where each dollar you save into the plan is wholly or partially matched by your employer. Essentially, it’s free money. Once you leave your job, however, you lose employer matching and you won’t be able to make contributions on your investment. Without active contributions, multiple 401(k) accounts tend to be forgotten easily and left untouched, while carrying high administration fees. Also, rebalancing your investment portfolio—an exercise financial advisers recommend doing annually—becomes a hassle with multiple overlapping stashes of retirement money.
Of course, you can also invest these funds in a standalone Investment Retirement Account (IRA), which comes with its own advantages and disadvantages, but typically a 401(k) with employer matching is the best option for long-term investing. That said, not all 401(k) plans are eligible for consolidation, or offer employer matching or investment choices—so you’ll want to carefully examine your options with a financial advisor before proceeding.
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How to make your decision
Before you decide to merge old 401(k) plans into your current plan, consider the following:
- Does your current employer plan offer more investment choices?
- Are the current fees lower than previous plans?
- Are you better off with your 401(k) plan instead of an IRA?
- Does your employer match contributions?
If the answer to these questions is yes, you’ll likely want to rollover your 401(k)s into your current plan. Transitioning to a single 401(k) should be seamless and free of taxes or penalties.
Advantages of a consolidated 401(k)
Aside from employer matching, other advantages to a consolidated 401(k) include:
Perks for larger account balances
Some lenders offer perks if your balance exceeds a minimum threshold. By pooling your investments, you may qualify for cash-back rewards, waived fees, or premium customer service. A larger balance also allows you to take out a bigger loan or hardship withdrawal in the event of an emergency.
Easier to manage
You can monitor your investments in one place and avoid all the multiple account numbers, logins, and passwords that you have to remember (and likely lose). Tracking one 401(k) investment makes filing your taxes easier, too.
Reduced fees
Each of your old retirement accounts require a custodian to report contributions and withdrawals to the IRS, and most custodians charge an annual fee. The more accounts you have, the more you’ll pay.
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