401(k): Pressure's On to Leave It at Your Old Job

January 4, 2017 — 10:35 AM EST

What happens to your 401(k) or other company-sponsored retirement plan once you say goodbye to your employer? What used to be an easy decision is beginning to get a little less clear-cut.

In the past, once you gave notice, you received a nice letter from your firm, pretty much urging you to move the money out of your 401(k) and into your own IRA. Sure, they didn’t mind if you left it there, but that wasn’t the norm. Today, companies are changing their tune. Now, those goodbye letters are urging you to keep your money right where it is: under the watchful eye of the company’s investment management firm. Why the change?

The answer can be summed up in two words: buying power. In the world of wealth management, the bigger the company's balance, the more negotiating power it has; the more negotiating power it has, the less the company will pay for management services. Companies know (and you should too) that small differences in fees can add up to massive savings over time, so they are doing everything they can to keep the total amount invested as high as possible.

They're especially interested in having upcoming retirees keep their accounts in place – because they're the ones with the largest balances. 

Should My Account Stay?

You probably know the answer: It depends. It depends on the quality of your retirement plan. In general, the larger the company, the better the 401(k). Here's why: Larger companies have more employees. The more employees, the bigger the total asset balance. And the bigger the total balance, the smaller the fees the investment company will charge. So, if you work for a behemoth like Boeing, Citigroup, Visa or GE, your retirement plan might be worth sticking with.

International Paper has about $5 billion in employee assets in its 401(k) plan; workers pay about 0.45% of assets in fees, estimates Robert Hunkeler, vice president of investments. As management fees go, that’s a good deal. Other companies, with more than $1 billion in their 401(k) plans, pay as low as 0.31% in fees.

But according to industry data sources such as BrightScope and ICI, companies with $10 million or less in assets will pay an average management fee of 1.1%. While that doesn't sound like much, over time 1% can eventually be a big drag on your investments' earning power (for an illustration, see Are Pensions Dipping into Automated Investing?). Although the company may pay a portion of that fee, most is getting passed on to the employee – that is, you.

Another area where size matters: investment options. As part of your company-sponsored plan, you usually have a choice of mutual funds across the investment spectrum. The list is governed by what your company and the investment firm agreed on.

Look at the expense ratio of each of the funds you can choose. If you have numerous fund offerings on the low side of the expense ratio (below 1%), sticking with your company 401(k) might be worth considering. If your plan is dominated by high-priced options, however, rolling over to your own IRA might be well-advised (and so would reading Stop Paying High Mutual Fund Fees).

“Most of the 401k plans that I’ve reviewed were structured to benefit employers, not employees,” says Glenn Surowiec, managing member of West Chester, Pa.-based GDS Investments, which handles a lot of 401(k)-to-IRA rollovers. “The number of investment options within most 401(k)s are narrow, underperforming and expensive mutual funds. Rolling over to an IRA provides a much more flexible experience.”

Other Considerations

If you do roll over your plan into an IRA, you will have more – or more appropriate – investment options. (See 401(k) Rollover: Pick Roth IRA or Traditional IRA.) However, you probably have to pay to get the help of a financial advisor (unless you’re an investing pro). But, like your investment choices, your advisor options are wide open. Maybe you’re looking for the personalized services of a money manager, or maybe you’re happy parking funds with a big bank, like the one your parents used. Either way, it’s your choice.

Another consideration: your age. The IRS allows an employee who retires, quits or is fired from a job at age 55 to make withdrawals from his 401(k) plan at that firm, without the usual 10% penalty that applies before age 59½. That’s not an option with IRAs. If you’re an early retiree and think you might need the cash, the 401(k) will offer a little earlier liquidity. 

The Bottom Line

Once you retire or leave the firm, your employer isn’t going to match your 401(k) contributions any longer, of course. So whether to keep the plan or not basically comes down to the math.

If you maintain your 401(k), you’ll likely continue to pay plan administration fees, the expense ratio of each of the funds and possibly other transaction fees and operating expenses. Your job is to add up those fees and compare them to what you would pay if you rolled over your funds to an IRA and paid another advisor to manage them for you. Unless, of course, you go the passive-investing route: See Active vs. Passive Investing During Your Retirement Years.

Before you retire, ask for proposals from a few advisors and compare the costs to the total expenses you pay in your 401(k). While there are other factors  in deciding whether to go or stay, the biggest consideration – as is usually the case in money matters – is the bottom line.