What should you do with your 401(k) when you leave an employer?

Most financial advisors will tell you it is wise to take advantage of your employer’s 401(k) plan or Roth 401(k) if they do any kind of matching. I agree. But when you leave an employer, I believe it is unwise to roll your old 401(k) into your new employer’s plan. I also believe it is probably less than prudent, in most cases, to keep the old 401(k) with your former employer. Each time I left an employer, a total of three times, I rolled my 401(k) and ROTH 401(k) accounts to my own Rollover IRA or ROTH IRA when I left an employer. My reasons were as follows:

1. The company-provided 401(k) plan had a limited number of good investment choices. I wanted more choices, including ETF’s and stocks. I want a wide range of investment choices rather than a select group of high-cost mutual funds.

2. The investment choices generally had a higher expense ratio than I wanted to pay. I want to keep my overall expenses under 0.05%. You generally cannot do that with an employer-sponsored plan.

3. I wanted all investments visible in one place, not scattered around in multiple accounts at different employers. This can come in handy when you must withdraw funds or move assets between accounts for tax purposes.

4. I had been on the investment fiduciary committee for the employer’s 401(k)’s and knew how decisions were made regarding the funds. Unfortunately, the fund choices were not always the ones I felt were best for my needs.

5. I had seen more than one employer discontinue a fund in favor of another similar fund but timed in such a way that I was unhappy with the results.

6. If the market is behaving poorly you can more quickly make changes that are to your benefit. Mutual funds only trade at the end of the day, so you get the end-of-day price at the close. If you want to take advantage of market corrections, being able to buy a stock or ETF mid-day is a helpful option.

In summary: I wanted more control and visibility without going to and depending on multiple game plans and accounts. I believe this is the best course of action for most employees. Don’t fall victim to the idea that you cannot manage this separate from the former employer’s plan. It isn’t hard to learn how to buy and sell quality investments. Obviously, it takes some work, but the good news is that you can move your positions to your own Rollover account without immediately selling your mutual funds. Take your time, develop a plan, and start asking questions to learn more.