NEW YORK (MainStreet) —For professionals in their 30s, a decade-plus spent in the workforce not only means that they’ve held a number of different jobs at different companies but also that they've held multiple 401(k)s spread across their former employers. But all too often, people have not taken the steps to consolidate these stray pension plan accounts.
“It’s a significant problem,” says Kile Lewis, co-CEO and founder of oXYgen Financial, a full-service family office in Alpharetta, Ga. for clients in their 20s and 30s — or the so-called Generations X and Y. “One of the biggest issues for this demographic is they have four or five small accounts, and so it doesn’t seem like a lot of money to them.”
In fact, Lewis says that he recently met with a young married couple who each had multiple old 401(k)s, with roughly $3,000, $7,000, $8,000 and $9,000 in them respectively. Rather than figuring out a way to consolidate those accounts, the couple instead decided to cash them out.
“They said that they didn’t think it was a lot of money,” Lewis says. “I said, ‘That’s $30,000, buddy.’”
Steven B. Goldstein, vice president and private CFO at oXYgen, says the chance to have immediate money on hand can unfortunately be too tempting for some people in their 30s to pass up.
“For people in this age group there are other cash-flow needs — maybe they recently bought a home or just had kids and they are cash-flow strapped,” Goldstein says. “They see this as a source of money if they cash [the 401(k)] out.”
How to Play Your Options
The best strategy for consolidating these old 401(k)s will not necessarily be the same for everyone, according to Sarah Walsh, vice president of retirement solutions at Fidelity Investments. Although the most common piece of advice one may hear from friends and family is to rollover your old 401(k) accounts into an IRA, this might not always be the right option.
Walsh gives four different approaches people can take with their old accounts: leave them in place, roll them over into a current company’s 401(k), roll them into an IRA or take a distribution in cash. The last option is strongly discouraged by Fidelity, Walsh notes, because of the tax hit and potential withdrawal penalties.
Walsh says the reasons for leaving money in a former company’s 401(k) could include its attractive investment options that are institutionally priced and because it has favorable money-management services.
“These are perfectly good and valid reasons for leaving your money there,” Walsh says.
These reasons for leaving money in your old 401(k) could also be the same ones for rolling your money into your current employer’s plan. In addition, moving your money into a current 401(k) could also help ensure that you have the right asset allocation and are properly diversified.
As for a Rollover IRA, Walsh notes that this can make sense for people who are changing jobs fairly regularly and want to consolidate their money. She says an IRA can often offer more attractive investment options than an employer 401(k) and also allows people eventually to convert their assets into a Roth 401(k), which can provide tax-free withdrawals if certain criteria are met.
Catherine Golladay, vice president of 401(k) participant services at Schwab Retirement Plan Services, adds that a Rollover IRA gives people more ways to access and receive distributions whenever they eventually retire.
“Whichever option you choose, the most important thing is to keep your money invested and working for your retirement,” Golladay says. “It may be tempting to take the money and run when you change jobs, especially if you could use the cash, but then you wouldn’t be using it for what it was originally intended — retirement.”
Meanwhile, oXYgen Financial's Lewis offers a scenario where keeping money in a 401(k), instead of a self-directed IRA, could make sense: If a person wants to start a business, he or she can borrow money out of the 401(k) as capital to help fund their venture — which could be especially helpful at a time when bank loans are much harder to secure.
Lewis says that in his 20 years in the financial services industry it has never been easier to move money out of an old 401(k) than it is today. At the larger 401(k) providers, it could be as simple as making one phone call.
“When I first started you had to track down all kinds of paperwork and you had to jump through eight hoops — it was a real pain,” Lewis says. “Now you can go online and move money or call up the provider — I’ll even make the call if a client doesn’t want the hassle of making the call themselves.”