When you work for a company that offers a 401(k) plan, it can be tempting to sign up. First of all, many companies that sponsor 401(k)s match worker contributions to some degree. Plus, saving in an employer 401(k) couldn’t be easier. You just tell your company’s payroll department how much money to allocate from each paycheck to retirement savings, and bam — your 401(k) gets funded right off the bat so you’re able to stay on track.
But there may come a point when it no longer pays to keep money in a company 401(k). If these signs apply to you, you may want to transfer your funds out ASAP.
1. You’re leaving your job
Getting a new job could better your financial picture by opening the door to improved benefits and pay. But if you’re quitting your job, it’s best to take your retirement savings with you. If you don’t, you risk forgetting about that money.
And if you’re thinking, “How on earth would anyone forget about their 401(k)?” consider this: As of May 2023, there were more than 29 million left-behind 401(k) plans, according to data from Capitalize. The total value of those accounts? A whopping $1.65 trillion.
If you have a new job lined up at the time of your resignation, you could try directly rolling your old 401(k) into your new employer’s plan if you’re eligible to participate in it right away. Otherwise, you can open an IRA and roll your funds into that account.
2. Your employer is on the verge of folding
It’s one thing to leave your job and decide to keep your 401(k) where it is. But if your company is struggling financially and is about to go under, then you may want to take your money and put it elsewhere.
Your 401(k) funds are protected in the event of an employer closure or bankruptcy — meaning, your money can’t be taken away from you. But when a company closes, usually, its 401(k) is shuttered as well. If you wait until that happens to move your money, you might have to act quickly, leaving you with less time to find the right IRA for you.
3. The fees are ridiculous
Some of the fees you face in your 401(k) might stem from the specific investments you choose. Mutual funds, for example, are a common investment you’ll find in a 401(k). So are target date funds. But both are notorious for charging expensive fees.
Now, you can get around mutual and target date fund fees by investing your 401(k) in index funds, which tend to charge much lower fees because they’re passively managed. But your 401(k) might also charge hefty administrative fees, and those are fees you can’t control. If that’s the case, and your fees are eating away at your returns, then it could pay to see if an IRA you open yourself with a stock broker allows you to save for retirement without incurring as many costs.
It can be a good and convenient thing to save for retirement in a company 401(k). But in these situations, it could be best to find a new home for your money, and pronto.
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