Leaving a job can be a stressful situation. That stress is not helped by making a big decision like whether or not to roll over an old 401k plan, so most people don’t bother making a decision and just leave the plan behind.
Issues With 401(k) Plans Left at Old Employer
At first glance, there is little reason to not leave a 401(k) plan account with an old employer. The money is still yours either way, and you can still manage your investment options within the 401(k) account.
However, there are many reasons that rolling over a 401k into an IRA is the smart move for the savvy investor.
The first important reason is that inside a 401(k) plan, you are limited to certain investment options that are chosen not by you, but the plan administrator of the 401k. While those investments may be satisfactory today, there is no guarantee that they won’t change in the future.
Additionally, 401(k) plans do have fees and expenses associated with them, although they are often hidden from plain view by the way the plans are structured. Similar investments may be cheaper outside of the structure of the 401k account.
However, the biggest reason to roll old 401(k) accounts into an IRA is that it is hard enough to manage your “current” investment accounts, including a new 401(k) plan at another job. Making sure that your portfolio is sufficiently balanced across several types of investment accounts is only made more difficult by having orphaned 401(k) accounts that you may not adequately consider in the mix.
Even worse is that many people lose track of things like passwords and PIN numbers when they leave behind 401(k) accounts which means that they cannot manage the assets inside of them. For many the hassle of getting new ones is just too great, so they stop bothering to manage the assets at all, even after the funds inside the plan have changed and their carefully chosen investments have been automatically moved to whatever defaults were setup.
When the time comes that accessing the account becomes necessary, recovering the necessary information can involve a phone call to someone who has no idea who you are and perhaps even works at a completely different company thanks to a buyout or merger.
Waiting 10 to 14 business days for a new PIN to arrive in the mail is no way to successfully make time sensitive investments or portfolio reallocations.
