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I recently read the HumbleDollar guidance suggesting retirees consolidate old 401(k) accounts for simplicity. My husband and I are both retired (age 62) and are wondering whether that advice still holds when the existing plans are high quality.
We each have a former-employer 401(k):
– Mine is with a large financial institution
– My husband’s is with his union
Both plans have low costs (~ 65 bps all-in), solid investment options, and no required distributions yet. We also have a taxable brokerage account at a bank, but rolling the 401(k)s there would likely increase our fees.
Given that we’re already retired and not contributing anymore, is consolidation still prudent if it means higher fees and no meaningful investment improvement? Or is keeping well-run legacy 401(k)s a reasonable exception to the consolidation advice?
I’d appreciate perspectives on simplicity vs. cost vs. control in this situation
One thing that is often overlooked and needs to be considered is it is possible that beneficiaries may be treated differently in an employer sponsored plan (401k) vs an IRA.
For example, in the Fed Govt TSP, there are no obvious issues when a beneficiary inherits an account from the original owner. Assuming it’s the spouse, they can continue along w age based RMDs as the new owner of the account. However, behind the curtains at the TSP, the account has been changed from a “participant” account to a “beneficiary” account. I believe the beneficiary may then establish their own beneficiary(ies). Here’s the problem. When the original beneficiary dies, the downstream secondary beneficiaries get a lump sum distribution of the account balance. There is no option to assume the account. There is no option to roll the account over to a private IRA. A fully taxable (assuming not a Roth) distribution is made. Case closed.
This is potentially a huge tax problem and the main reason I transferred 90% of my TSP to a rollover IRA.
My understanding is Congress did not want employer plans to be tasked w managing legacy accounts for employees that died ages ago whereas private custodians like VG, FIDO, etc., are happy to do so. Maybe Mr. Q has more insight here.
Anyway, may be a non-issue for some depending on the plan, account balance and/or family status but definitely worth looking into.
Maggie,
As long as you are comfortable with your fees and investment options, my suggestion would be when you review your asset allocations look at the combined results.
look to see if the combined asset allocation aligns with your planned allocation. Sometimes you may not realize a specific account could become unbalanced in stocks or bonds and depending on the accounts relative size could through off your total intended allocation
also, i believe each account should have some exposure to stocks and bonds to allow for rebalancing within each account.
Every chance I get to roll out of a 401(k) and into an IRA, I do it. I’ve been part of company sales twice in the last 2-1/2 years and took advantage of the opportunity both times. I don’t want someone else picking my fund lineup. I don’t want someone having to approve my distribution. You, on the other hand, maybe happy with your investment lineup and not bothered by the things I am. But I really don’t want anyone else in my business or making any decisions about my investments but me.
Just a couple of thoughts, some of which have already been touched upon.
65 bps is pretty high – not sure if it’s the 401(k) plans themselves or you are invested in actively managed funds.
Most 401(k) plans have limited investment options, but most have low cost equity index funds available which should mitigate any cost concerns. I’ve found bond options to be more limited in our 401(k) plans.
Having a taxable brokerage account at a bank does not seem cost efficient.
As for asset protection in the event of a legal liability finding – you’ll need to check your specific state laws, like other have said, and possibly get an umbrella insurance policy if needed.
If you really want to lower your investing costs and simplify, my suggestion would be to move your brokerage account to Fidelity or Vanguard – and then roll over the 401(k)’s the new brokerage.