Managing multiple retirement accounts can be confusing and time-consuming. Getting them under control is what motivates some of my clients to hire me in the first place. The good news is that it can be done, and it is often in your best interests to combine some (or all) of your accounts. The bad news is that it often requires an upfront investment of time and effort to make this happen.
The average tenure for a US worker at their current job is 4.2 years. That means the average worker in the US will likely have 8 or more jobs during their working life. If each of these jobs has an employer-sponsored retirement plan (i.e. 401K), then the average worker could end up with 8 or more different retirement accounts by the end of their career. That can be a lot to manage.
Fortunately, accounts that receive the same tax treatment can usually be merged into a single account. By the same tax treatment, I mean whether they are taxed before the money goes in (think ‘Roth’) or taxed after the money comes out (think ‘traditional’). (There are other variables at play, but those two categories cover most people.) In other words, most of the time, all your traditional retirement accounts can be merged into a single traditional IRA, and all your Roth retirement accounts can be merged into a single Roth IRA.
But – just because you CAN move them doesn’t mean you SHOULD move them. The question is – is it in your best interests to merge some or all your accounts? Let’s look at the pros and cons of merging.
1. It is easier to see how the portfolio is being managed. The most important factor in reaching your financial goals is proper asset allocation. When your portfolio is spread out over 6 or 8 accounts, and each account has several different investments you can easily lose track of how your portfolio is allocated. Making asset allocation easier to track is a good thing.
2. It is easier to know what your fees are. Each retirement plan has a different fee structure (as do the funds the plan invests in). Fees are the second most important factor to long term investing success. Tracking your fees over multiple accounts and multiple investments per account can be a real hassle. Reducing the number of accounts to track makes it easier. (It may also make it possible for you to reduce fees.)
3. It is easier to make sure your account beneficiaries are correct. Beneficiaries are the people you want to receive your account in the event of your death. You should have beneficiaries declared for all your retirement accounts. Doing so enables them to bypass probate and get released to the beneficiary(ies) sooner. Over a 40-year career many people get married, have children, get divorced, get remarried, and maybe have more children. Each of those events might lead a person to want to change their beneficiary designations on their retirement plans. That’s a lot of updates! Reducing the number of accounts simplifies beneficiary designations.
4. Better investment options. (This one is often true but not always true.) Companies typically hire an outside firm to manage their employer-based retirement plans. Those management firms are trying to be as profitable as possible. To that end they will often limit the investment choices in the retirement plan to funds that earn them the most money. By moving your retirement accounts to an IRA, you can often get more and better investment options. (A notable exception to this is the federal retirement plan, TSP. I never recommend people move out of TSP while they are still working.)
5. You don’t have to update your address as often. In addition to changing jobs, people also move more frequently these days. If you want your account paperwork to find you, you’ll need to provide each account with a change of address update. (It is common for a client to tell me they think they have an account with XYZ, but they haven’t seen a statement in a long time, so they aren’t sure. The reason they haven’t seen a statement in a long time is because they moved and never told the firm managing their retirement account where to send the statements!)
6. Fewer statements to review. Investment accounts are required to send you periodic statements. This is for your protection, and you should review your statements when you receive them. While the government requires the statement to be sent, they do not mandate a specific format for the statement. You may have noticed this already. You must train yourself to read the different statements from the different companies sending them. It is annoying and frustrating. Fewer statements would streamline this process and reduce the annoyances.
7. Simplifies the distribution of funds when you retire and start withdrawing from the accounts. Once you reach age 70 ½ you are required to take minimum distributions from your traditional retirement accounts and employer-based Roth accounts. It may be advantageous to you to liquidate your holdings in a specific order. If you have multiple accounts with multiple holdings in each account, managing the order of liquidation can be difficult. Additionally, if you move your employer-based Roth accounts to a Roth IRA you are not required to take distributions at age 70 ½ - which can provide you with more options in retirement.
1. Expect it to be an annoying paperwork drill. In this glorious internet age I can open an online investing account, connect it to my bank, fund the new account, and then place an order to purchase stocks, bonds, or funds all within an hour and without leaving my chair. It is simple, intuitive, and lightning fast. Yet, if you want to move money out of your retirement account most retirement plans require you to call them on the phone, fill out a lengthy form they will send to you, and then fax it or send it via snail mail. There are several reasons for this, and some of them are for your protection, but the people currently managing your account are making money from you and if you move your account they will no longer be making that money. The law says you can move your account, but many account managers do not make it easy. Expect delays and Janice from customer relations to explain to you why you shouldn't move your money out of your account with them.
2. You might not be getting a better deal. Last year the Obama administration enacted something known as the fiduciary rule. The intent of the rule is to ensure investment advisers are providing clients advice that is in the best interests of the client. The government took this action because there were many investment advisers who were not doing this. Americans have trillions of dollars invested in retirement accounts. That's a lot of money to be managed. Some advisers were encouraging their clients to move their current accounts so they would be under the management of the person giving this advice. Often the new account managed by the adviser was offering worse investments and charging higher fees than the old retirement account. The fiduciary rule has slowed this practice, but it hasn’t stopped it completely. There are still advisers out there trying to lure clients into moving perfectly good retirement accounts into accounts designed to bring the adviser higher fees and commissions. You need to be careful before moving your account based on the advice of someone who gets paid to manage accounts.
Merging your retirement accounts is often a good financial move. It can help you save time, reduce fees, streamline the administration of the accounts, get you access to better investment options, and simplify the distribution of account funds when you need them in retirement. There are some downsides to the process, but it is often the best course of action.
I review client retirement accounts and recommend clients merge accounts when it makes sense to do so. If you were considering merging some of your retirement accounts, give me a call and I can help you assess whether it is the best move forward for you.