What to do with your 401(k) in retirement

For many employees, what to do with a 401(k) plan in retirement was a foregone conclusion: roll it over.

The ability to retain assets after employees retire – and thereby reduce costs for the overall plan – is not lost on defined contribution plan advisors. In a 2021 Pimco survey of retirement plan consultants and advisors, 36% of companies said they actively encourage participants to continue their plans after retirement.

If you’re wondering whether it’s worth leaving your assets behind or transferring them into retirement, here are the key questions to ask, listed in order of importance.

How good is the 401(k)?

This is the key question when deciding whether to leave assets in a plan or roll them over. You should evaluate the quality of the plan based on three key indicators: the quality and breadth of the investment offering, the investment fees for the plan’s fund options, and the administrative fees the plan charges its participants.

You can use Morningstar ratings and data to evaluate investment options, but you may need to do additional research if your plan includes collective investment funds rather than publicly available mutual funds.

Do you need early access to your funds?

If you are a recent retiree and need access to your money before age 59.5, remaining in the 401(k) plan may be the most practical solution, even though the 401(k) isn’t that great. Indeed, investors in 401(k) plans who have left their employer can tap their assets a little earlier without penalty – at age 55 – compared to age 59.5 for IRA investors. Just make sure you’ve fully assessed the long-term viability of your portfolio before considering withdrawals at such an early age.

Does the plan allow flexibility in withdrawals?

Some plans may not allow retirees to choose which investments they tap for withdrawals, but instead require them to take prorated distributions of all account holdings. This lack of flexibility can be a major disadvantage for retirees who want to use their withdrawals to continually keep their asset allocation in line with their goals.

Along the same lines, if the plan offers traditional and Roth options, the participant may not be able to choose which account to withdraw from; distributions may need to be paid pro rata between the two types of accounts.

Do you need creditor protection?

Legal protections are another reason to consider staying in an old 401(k). Although laws regarding creditor protection for retirement assets vary by state, company retirement plan assets generally have better protections from creditors and lawsuits than IRA assets. Obviously, these protections will be more important for those who have had credit problems or bankruptcy, or who work in a profession where they risk being sued.

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