Is It Better to Have One 401k or Multiple?

A 401(k) plan serves as an employer-sponsored retirement savings vehicle, allowing employees to contribute a portion of their wages into individual accounts for long-term growth. These plans offer tax advantages that vary depending on whether contributions are pre-tax or Roth. Over the course of a career, individuals frequently accumulate more than one of these accounts, often due to transitioning between different employers.

Understanding Why Multiple 401(k)s Arise

Individuals acquire multiple 401(k) accounts when they change jobs. Upon leaving an employer, the 401(k) account established during that employment generally remains with the former plan administrator. This situation creates a trail of retirement accounts, each tied to a previous workplace.

While job changes are the primary driver, other scenarios can also lead to accumulating multiple plans. For example, a company merger or acquisition might result in changes to the existing retirement plan, potentially separating an employee’s old balance from a new one. Individuals holding multiple part-time positions with different employers might also find themselves enrolled in several distinct 401(k) offerings concurrently.

Key Factors for Comparing 401(k) Accounts

When evaluating multiple 401(k) accounts, several factors warrant careful consideration to determine the most beneficial approach for your retirement savings.

Fees are a significant factor. These can include administrative fees, which cover record-keeping and other management services, and investment management fees, often expressed as expense ratios. While some employers may cover administrative fees, they are often passed on to participants, either as a flat fee or a percentage of assets. Expense ratios, which are a percentage of the fund’s assets, can significantly impact long-term growth; they can range from 0.2% to 5% of assets, with anything above 1% considered high.

The breadth and quality of investment options available within each 401(k) plan also play a role in comparison. Plans typically offer a selection of mutual funds, including index funds, target-date funds, and various stock and bond funds. Some plans may also provide access to exchange-traded funds (ETFs) or, in rare cases, individual stocks. The ability to diversify investments and align them with your risk tolerance and financial goals is an important aspect of a plan’s investment menu.

The ease of managing each account is another practical consideration. This involves evaluating the convenience of online portals, the clarity of statements, and the accessibility of customer support. Having a single, consolidated account can simplify the process of monitoring investments and making adjustments, reducing the administrative burden.

Loan and withdrawal provisions are another factor. While the ability to take a loan from a 401(k) is a common feature, specific terms or availability might vary.

The 401(k) Consolidation Process

For individuals who decide to streamline their retirement savings, consolidating 401(k) accounts through a direct rollover is a common and recommended approach. This method involves transferring funds directly from one qualified retirement plan to another, or into an Individual Retirement Account (IRA), without the funds ever being in the individual’s direct possession. This direct transfer helps maintain the tax-deferred status of the assets and avoids potential tax implications or penalties.

The first step involves researching the receiving account, which could be a new employer’s 401(k) plan or an IRA. It is important to confirm whether the new employer’s plan accepts rollovers from external accounts, as not all plans do. If rolling into an IRA, you would need to open a Traditional or Roth IRA if you don’t already have one, ensuring it aligns with the tax treatment of the funds being rolled over.

Next, contact the plan administrator of the old 401(k) account to initiate the rollover request. This typically involves completing specific forms provided by the former plan’s custodian. You will need to provide them with the necessary details of the receiving account, such as the new plan’s name and address, or the IRA custodian’s details and your account number.

Once the forms are submitted, the old plan administrator will send the funds directly to the new plan administrator or IRA custodian. This direct transfer is crucial because if the check is made payable to you, the IRS generally requires a 20% federal tax withholding, which must be covered and redeposited within 60 days to avoid taxation and potential penalties. After the transfer, confirm the funds have been successfully received and correctly allocated within the new account.

Considerations for Maintaining Multiple 401(k) Accounts

While consolidating retirement accounts offers benefits, there are specific situations where keeping multiple 401(k) accounts might be a strategic decision. These scenarios often involve unique features or advantages present in an older plan that may not be available elsewhere.

One consideration is the presence of unique investment options within a former employer’s plan. Some older plans might offer access to specific stable value funds, institutionally priced funds, or even company stock at a favorable basis that are not replicable in a new employer’s plan or an IRA. If these investment choices align with your financial strategy and offer distinct advantages, maintaining the old account could be beneficial.

In some instances, an older 401(k) plan might have exceptionally low administrative or investment fees compared to a new plan or available IRA options. If the fee structure of the old plan is significantly more favorable, it could be financially advantageous to leave the assets there to minimize costs over time. However, this requires careful comparison of all fee types across accounts.

Another factor involves the federal creditor protection afforded to funds held within active 401(k) plans. These plans generally receive strong protection under the Employee Retirement Income Security Act (ERISA) from creditors and legal judgments. This level of protection can be a consideration, especially for individuals in professions with higher liability risks, although IRA protection varies by state law.