How many times have you changed your job?  I bet more than once!  Our generation (millennials; aka people born between 1980-1996) has a reputation for job hopping.  Gallup conducted a study on this topic in 2016.  The data revealed millennial job-hopping is a real thing.  According to their study, 21% of millennials said they changed jobs during the past year.  That’s three times the number of non-millennials! 

It’s no secret that our generation is open to seeking new opportunities.  Heck, we started our careers during the Great Recession and a decade later we are dealing with a global pandemic.  New opportunities are a part of how we adapt to survive in our fast changing economic environment.   

Changing employers is inevitable for all of us, including our parents.  In 2019, the Bureau of Labor Statistics surveyed baby boomers and found that our pension-loving-parents averaged twelve jobs in their lifetime.  Employers are aware of the job-hopping landscape, therefore, it’s crucial to provide employee benefits and incentives to stay.  We millennials will not be fooled by ping pong tables and free pizza.  If the pay, incentives, and work/life balance is weak, we leave.  However, just because you say sayonara, doesn’t mean your 401(k)/403(b) goes with you!  That stays put until you take active measures to move it.  And let’s face it, most of us don’t!  

In this blog, we are going to discuss why you should consider consolidating your older retirement plan accounts.  Note: Before consolidating your accounts, it is essential to review the pros and cons of your situation.  If you haven’t already, reach out to us to discuss your specific situation on how consolidating may improve or worsen your situation.  

Managing Your Investments

Your overall investment allocation is a vital part to reaching your life goals; whether that’s retiring early or buying a Mercedes Sprinter van and traveling the country (I’m still trying to convince Natalie with that one, any pointers!?).  

Your allocation is viewed as the mix of stocks, bonds and cash (for the most part).  For example, an aggressive investor may have an allocation of 90% stocks and 10% bonds. Seems simple enough, right?  Well, now try figuring out the math when you have 5 different 401(k) accounts that are all invested differently.  As the number of employer accounts grows, it can become complicated very quickly.  Oh wait, you’re married?  What about your partner’s 7 accounts?  Don’t forget those....and the traditional/Roth IRAs and taxable investment accounts too!  The fewer accounts you have, the less complicated it is to understand your overall investment allocation.

Simplify Your Balance Sheet

Your balance sheet lists all of your financial accounts, tangible assets, and liabilities.  It also provides your net worth figure.  Your net worth is defined as your total assets less your liabilities.  

For example:

Assets

Checking - $10,000

Savings - $40,000

401(k) - $100,000

Roth IRA - $10,000

Home Value - $350,000

Total Assets - $510,000

Liabilities

Student Loans - $50,000

Auto Loan - $20,000

Mortgage - $150,000

Total Liabilities - $220,000

In the above example, the net worth is $290,000 (total assets $510,000 - total liabilities $220,000).  This balance sheet is pretty straightforward, and I hope yours looks like this.  However, it’s uncommon to see a balance sheet that is this clean.  We have seen couples’ balance sheets very long and with multiple line items.  This can create confusion and frustration on what’s what.  We advocate to simplify your balance sheet as much as possible.  This means reducing the number of accounts you have by consolidating accounts appropriately.

Since we are on the topic of balance sheet simplicity, I want to share another example of over complication that we hear all the time:

“My Blue Bank savings account interest rate is 1.25% but Yellow Bank is offering 1.50%, should I transfer my balance of $50,000 to get a better rate?”

Let’s do the math.  In this example the individual will receive an annual interest payment of $625 at Blue Bank and $750 at Yellow Bank.  The total difference if the transfer is made is $125...per YEAR.  As a practical consumer, you need to ask yourself if opening a new account, completing paperwork, transferring money, and developing the poor habit of chasing returns is really worth it.  We’d say no, your time is much more valuable than that.

I’ve shared this before in my writing, and I want to share it again here because it is so applicable.  The best advice I ever received in this industry is, “keep it simple and stupid”.

Reduced Costs

The mutual funds or exchange traded funds (ETF) held within your retirement accounts all carry an expense for management and administrative reasons.  This is called an Expense Ratio.  Sometimes 401(k)s/403(b)s have higher expense ratios than similar offered funds in your current plan.  Your old 401(k) may charge an annual fee that your current plan doesn’t.  Reducing the amount of accounts you have will help you better understand which retirement account charges what.  This type of consolidation may also help you reduce costs that are eating away your overall investment return.  

Distribution Planning

It may be hard to imagine what your life will look like in 30-40 years, but for now, let’s imagine ourselves in that time.  You’re retired.  Over the course of your career you have been diligently saving for retirement in various employer 401(k) accounts.  All of the money that you saved is pre-tax, meaning you haven't taxed you on the money yet.  However, when you turn age 72 you’ll be forced to take funds from your account.  These forced distributions are called Required Minimum Distribution (RMD).  Your RMD is based on your account value divided by your life factor.  If you have one account, you only have one distribution to worry about.  But, if you have four accounts… you will have four distributions to administer.   Again, consolidating accounts and gaining simplicity is optimal in all financial situations.

Now that you know why consolidating accounts is beneficial, here are a few examples of how to rollover your old employer account.  Please know that this is not a recommendation.  We always recommend speaking with a fee-only financial planner on the best approach for your situation.

Example: Pre-tax 401(k) to Traditional IRA

Natalie has left her previous employer to start a new job.  She has an old pre-tax 401(k) that has a balance of $50,000.  Lucky for Natalie, pre-tax 401(k) dollars can be rolled into her existing Traditional IRA.  She can call her former employer’s plan sponsor (i.e. Fidelity) and request a rollover to her Traditional IRA.  

Each employer plan is unique in that you may be able to verbally request the transfer, or you’ll have to complete paperwork.  Be sure to have your employer 401(k) information available and also your Traditional IRA account information handy (account number, custodian, address to mail the check).

Example: Mix of pre-tax 401(k) and Roth 401(k)

Sam is starting a new job next week.  His 401(k) at his previous employer has both pre-tax dollars and Roth dollars inside of it.  He was contributing 50% pre-tax and 50% Roth.  Lucky for Sam, he can establish a Traditional IRA and Roth IRA and transfer the pre-tax dollars into the Traditional IRA and the Roth portion into the Roth IRA.

The process to complete this is done in the same fashion as the previous example.  It may seem overwhelming, but getting it done and having your accounts organized is worth it!  We have done countless transfers like this over our career.  If you need our help and reassurance it’s done right, just send us an email at hello@fyoozfinancial.com. 

We all seek to have greater clarity in our everyday lives.  Our personal financial situation is a part of that equation.  Becoming better organized at an early age creates better money habits in the long run.  Simplify what you have and spend more time enjoying what you love.

- Dan

Disclaimer:  This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.