When to Leave a 401(k) Plan

There are two scenarios when you may want to take control of your assets in your 401(k) plan.   

1. You leave your employer (either to retire or change jobs) 
2. You are over 59 ½ and want to invest your assets differently leading up to retirement. In this scenario, you are still working, but make an in-service withdrawal (70% of plans allow for them) 

How do you know if pulling your assets is right for you?  

First, it’s important to understand what you are getting with your assets in your current 401(k) or 403(b) plans. Typically, the fees associated with these plans are low – usually about 1%. That’s a good thing. You’re also getting diversified funds that allow you to participate in the market: Also, a good thing. Beyond that, you’re not getting much. With a 401(k) YOU are the one deciding how much money to invest with each paycheck. YOU are also the one picking the fund. Usually these funds are age targeted retirement funds that start off with more aggressive investments when someone is young and become more conservative as they approach retirement age. That’s a great strategy.

The problem is, the funds are usually more limited in a 401(k) plan, and the manager of those funds doesn’t know you. He or she is managing them within the parameters of the fund that are designed to reach a goal that works for the average person in that fund. So, you could be missing opportunities. This theme continues. If you want to know where you stand for retirement, there is usually an app or a meter you can find on your most recent statement with a weather forecast. Cloudy means you are off track and sunny means you are in good shape for retirement.

Again, this is working based on average assumptions. The meter doesn’t know you. It is assuming how you want to live in retirement, how much social security you might be receiving, what tax bracket you might be in, and takes no consideration for other assets or goals you have outside of retirement. So, for 1%, your funds are being invested in an impersonalized pool of monies, but you are lacking in most areas beyond that. The assumption is that you understand everything else – how much you will need in retirement, how much you can collect in social security, what amount to be regularly contributing to make up the difference, how other goals like protecting your family (life insurance), buying a boat or retirement home, etc. fit within your plan, and so on. Suddenly, 1% seems like a lot for what you are getting.  

For these reasons, I often recommend moving your assets out of your 401(k) plan when you are leaving your job or approaching retirement (the two scenarios described above). So now the question is, where are you putting them? 

 One of the best decisions you can make with your money is working with a professional. Talk to a CPA and Financial Planner. Yes, their fees are higher. But it often pays for itself. In this case, you may want to use an advisor outside your plan.  What do you get as a tradeoff for slightly higher fees? At our firm, we first have a discussion as to what your financial goals are. When do you want to retire? How do you want to live in retirement? Do you have other goals like leaving money to children or buying your dream home, boat or car? Once we know what your goals are, we look at what you currently have for assets including existing funds, life insurance and social security, as well as your unique tax situation.

From there, we create a financial plan that will work for you and construct a “tax smart” investment portfolio within that plan that will help achieve your goals. The investment portfolio is more robust than that of 401(k) plans and can be completely tailored to your individual needs. And, because it is your unique plan, we can make defensive moves within your portfolio to help avoid unnecessary losses- something that is a lot more difficult to achieve in a 401(k) plan that caters to the masses. With your plan in place and funded, we have regular meetings to discuss market changes, changes in your goals, tax situation, and unforeseen events (they happen – it’s important to plan for the unknown). Your plan is monitored to ensure it is always in step with your ever-changing life. If you have questions, we are there to answer them. And, as a multi-generational family firm, there is no need to worry about your financial advisor retiring before you do.  

When working with a financial advisor, the burden to decide how everything works cohesively as a comprehensive plan falls on the advisor, not you. And, because they are licensed and have years of experience, they more likely than not will know how to navigate the unknown better than you might and can think of things you may overlook. The fees are cheaper in your employer’s plan, but the lost opportunity is often far more expensive. Give us a call to see if there is more your retirement savings could be doing for you.