401(k)

Posted on December 30, 2008 by David Laidlaw 

Changing jobs usually requires a lot of busy work. New tax forms, changing healthcare plans, updating your e-mail, etc. Rolling over your 401(k) is one task that may get lost in the shuffle but shouldn’t. In fact, rolling over your 401(k) to an IRA can actually be a good opportunity to better allocate your investments. It’s especially important not to cash out a 401(k) and pay a tax penalty.

My wife manages commercial real estate in Manhattan. She’s changed jobs three times in the three years we’ve known each other as a result of buildings being bought and sold. The new owner of the building could make her an offer to stay at the building, she may stay with her current company and change buildings, or a 3rd property management company could swoop in with an offer to manage a better building.

The result is she’s become very good at the paperwork that comes with changing employers, including rolling over her 401(k). This has been a positive over the years because her 401(k) investment options have been limited.

Your 401(k) investment options are limited to whatever the person in charge of 401(k) administration at your company decided. This may not include the best options. All 401(k)’s should include a passively managed index fund, preferably a low fee fund indexed to the S&P 500. There should also be a low fee fund benchmarked to the Barclays US Aggregate Bond Index. These options give the investor a low cost way to diversify.

This is not always the case. Some 401(k)’s only have actively managed funds available and some don’t even have a pure bond fund. This severely limits the usefulness of the savings vehicle, although I would still recommend participating in your company’s 401(k) up to at least the amount your company matches. Once in an IRA, you can purchase almost any available investment option.

Given the recent job market turmoil, many people are probably finding themselves changing jobs or even without a job.  While it may not be the first thing on your mind, rolling over your 401(k) is a good idea.