Reflections

Do You Need Help Consolidating Old 401(k) Accounts?

By Sean Condon, CFP®

How many retirement accounts do you have to your name? When was the last time you logged in and made any active decisions regarding your investments?  If you have an old 401k account that has been left dormant, you are potentially losing an opportunity to improve your investment return and simplify your life.

Retirement accounts often represent the largest and most important asset for working professionals. Yet they usually receive the least attention and are the most likely to suffer opportunity cost losses from a “set and forget” strategy.

Further, when you do not give much thought to old 401(k)s, they could cause headaches down the road as you find yourself juggling various investment decisions, fee breakdowns, and rules for each account.  Most importantly, you might not be getting the most out of your retirement savings you worked for.

The good news is that there is a way to streamline the management of your retirement savings and possibly maximize your returns: account consolidation. Here is how it works and why it may be a good option for you.

How to Decide if Consolidating Is for You

How do you know if it is time to consolidate? There are a few things you will want to consider before consolidating multiple retirement accounts.

  • What kind of benefits and features do your retirement accounts offer?
  • Are there similar investment options in all your accounts?
  • What are the fees like on each of your accounts?
  • Can you roll over previous plans to a new employer? Or do you need to move to a self-directed IRA?

You will want to do your research to answer these questions before you make any moves. And remember, you do not necessarily need to consolidate everything into one. You can merge some while keeping others open. What is best for you will depend on your specific situation and goals for retirement.

Benefits of Consolidating Multiple Retirement Plans

When it comes time for retirement, there are several benefits of consolidating multiple plans into one account.

Here are just a few benefits to consider:

  • Reduced investment fees: Fewer retirement accounts can also mean fewer fees. Instead of paying fees for each of your account management services, you only need to pay one—meaning more of your money can grow.
  • Simpler portfolio rebalancing: When it comes time to rebalance your portfolio, having all your accounts consolidated makes it easier to align your asset allocation with your risk tolerance and return expectations.
  • More opportunities to save: You cannot contribute to an old employer-sponsored 401(k). You need to roll over the account to a new 401(k) or a self-directed account so you can continue contributing to that retirement fund.
  • Reduced administrative work for you: Fewer accounts mean simpler management. You do not need to worry about managing investments and documentation across different platforms. Instead of three different monthly statements, you just have one, while you can see all your investments in one location for more cohesive planning.
  • Easier calculations and withdrawals of required minimum distributions: If you have multiple 401(k)s at retirement, you will eventually need to take required minimum distributions (RMDs) from each of those accounts. When juggling multiple accounts, you risk missing a required minimum distribution or risk withdrawing the incorrect total amount, for which the IRS can make you pay a penalty. Having a single account makes RMDs much easier.
  • A clear picture of your money: Consolidating your accounts allows you to clearly understand how well your investments are working for you while enabling you to easily manage the account to meet your retirement goals. Retirement plan projections should always include all your funds in a comprehensive approach.
  • Opportunity for professional management: Many dormant 401k plans are often left in a simple target date retirement fund.  While these funds can be beneficial in some circumstances, they are certainly not tailored to your specific situation.  A financial advisor can help provide a disciplined process to build your portfolio.  In an intelligently designed portfolio, each piece works together on behalf of your goals.  It is designed on purpose. This fundamental aspect of financial planning can lead to actual results.  Vanguard’s study Advisor Alpha[1]suggests that most clients of financial advisors can earn about 3% more than those without one based on the implementation of a disciplined process.

Lastly, one of the biggest benefits of consolidation is saving time. Time is one of your most valuable assets. Having one consolidated account means you will spend less time managing all your accounts and free up more time and energy for doing what you love.

Reasons to Keep Old 401(k) Accounts Where They Are

While simplicity and investment clarity are typically improved by consolidating accounts, there are reasons to keep at least one 401(k) active.  If you are utilizing Roth Supercharge or back-door Roth retirement savings strategies, having money in a 401k versus an IRA can help you pass the “pro-rata” rule and ensure that those strategies are possible.  Second, some 401k’s have a “still working” provision in their plan that allows you to delay taking RMDs while you are still working.  So, if you have a 401k at a company where you foresee yourself staying in well past retirement age, keeping some assets in that 401(k) account can be an advantage.

Professionally Managed 401(k) of Your Current Employer

You will not want to consolidate your current employer’s 401(k).  An active 401(k) provides the best tax and savings benefits, especially if you are provided a matching contribution.  However, all the challenges related to simplicity, investing, and holistic planning are very present with 401(k) accounts left to be managed on your own.

Thankfully, at Windgate Wealth Management we have launched a new tool that allows us to professionally manage your current 401(k) account for a fee.  Traditionally, accounts such as 401(k)s or 403(b)s were not managed by your financial advisor, putting you further behind your financial goals. Advisors could not provide the ongoing management and oversight that is expected and required as a fiduciary due to limitations in technology. Now, current technology enables us to view, manage and trade any held away asset and provide you with the benefits of comprehensive portfolio management and reporting. This allows us to do the job you hired us to do — full, holistic account management and wealth planning — and helps you to rest easy that all your investable assets are being professionally managed.

Our innovative technology platform will allow us to manage your 401(k) the same way we manage your IRA and brokerage accounts. We will be able to proactively monitor and trade these accounts for you with a goal to increase account performance, implement tax strategies, and manage downside risk.

We Can Help You Consolidate and Maximize

Consolidating can mean greater returns and less headache in the future, but it can be challenging to navigate the process. If you have multiple retirement plans, or a current 401(k) in need of professional management, we would love to talk about how we can help you maximize your returns during a complimentary get-acquainted meeting. You can reach us by calling (844) 377-4963 or emailing windgate@windgatewealth.com. You can also book an appointment online here.

[1] https://personal.vanguard.com/pdf/ISGAA.pdf

Perritt Capital Management, Inc. is the Registered Investment Advisor for Windgate Wealth Management accounts and does not provide tax advice. Consult your professional tax advisor for questions concerning your personal tax or financial situation and your insurance agent for insurance advice.

Data here is obtained from what are considered reliable sources; however, its accuracy, completeness, or reliability cannot be guaranteed.

First published September 2022.

Past Performance does not guarantee future results.

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