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What to Do With a Bad 401K – From Performance to Fees

Is the 401K that your company offers bad? What happens to your 401K if you change jobs? These retirement tips are from financial expert Rick Rodgers.

Before the tips, a quip:

“Retirement is wonderful,” said Gene Perret. “It’s doing nothing without worrying about getting caught.”

Retirement – and doing nothing – is even more wonderful when you’ve IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out.

And, read on for Rodger’s options regarding a poor 401K company plan, and what happens to your 401K when you change jobs.

What to Do With a Bad 401K – From Performance to Fees

401K plans themselves are not bad.  It’s the investments offered in the plan that can be bad – not the plan itself. Evaluate the investments offered through your company’s 401K like any other investment you would consider. Check the performance of the investments compared to benchmarks (index returns) and then against their peers (other investments with the same investment strategy).

Fees should be the second step of this evaluation process.  Fees can have a big impact on your performance over time. And unfortunately, some 401K plans pass many of the fees on to you.

3 Signs of a Poor Company 401K Plan

  1. The investments offered through the plan are poor performers. For more financial tips, read 8 Money Laws to Boost Your Bank Account’s Bottom Line.
  2. The fees are high. Morningstar.com is a good source to find out what the average fund in a category should cost.
  3. There is no company match.  One of the best incentives you have to put money in the 401K is when your employer matches your contribution.  Unfortunately, not all employers offer this, and many have stopped contributing because of the economy. If your 401K doesn’t have a match program, you can often find better investments with fewer restrictions by investing in an IRA.

If you struggle with money management, read 6 Ways to Take Control of Your Finances – You’re the Boss!

What Happens to Your 401K if You Change Jobs?

Some employers require you to move your money out of the 401K when you leave.  Most plan administrators charge the employer based on the number of participants. Therefore, it is in the employer’s interest that you take your money elsewhere.

Keep in mind that many employers have a vesting schedule attached to their contributions.  This means that if you haven’t been employed at the company for very long, some of the money contributed by the employer is forfeited.  The company can never take back anything you’ve contributed.

3 Tips When You’re Moving Your 401K Money

  1. Cash out – You can request a check payable to you for the plan balance.  The plan is required to withhold 20% for taxes.  The pretax contributions and earnings will be subject to taxation plus a 10% early withdrawal penalty if you are under age 55.
  2. Rollover to an IRA – You can establish an IRA for yourself and have the 401(k) rolled over directly to your IRA.  This avoids taxation and the 20% mandatory tax withholding.
  3. Rollover to another 401(k) plan – Check with your new employer first.  Not all companies allow rollovers from another plan.  If your new 401(k) plan allows, the process is the same as for a rollover from an IRA.

Rodgers also contributed Simple 401K Tips – Withdrawing Funds and Paying Taxes, here on Quips & Tips for Achieving Your Goals.

If you have any thoughts on these 401K options, please comment below!

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Rick Rodgers, CFP® is an author, keynote speaker, wealth manager and President of Rodgers & Associates, “The Retirement Specialists”, in Lancaster, PA.  He is a 25 year industry veteran that specializes in helping people who are retired or about to retire make smart choices about money.

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4 thoughts on “What to Do With a Bad 401K – From Performance to Fees”

  1. I advise clients to get their money into their 401(k) plans as early in the year as possible. Investing early gives your money longer to grow tax deferred. Some people may want to dollar cost average into stock funds in their 401(k). These people should still make contributions into the plan as early as possible but allocate 100% of the new money to a stable value fund. You can move part of the money out of the stable value fund and into stock funds on a regular basis to implement a dollar cost averaging strategy.

    I don’t know what Andrew means by your bank having the answers. You should go to the person who is the plan administrator of your employer’s plan for answers on your 401(k). Companies have a lot of leeway in setting up their plan. Your bank would not know anything about the company plan unless they are the provider.

    401(k) options can be confusing but not all of them put your money at risk. All employers provide at least one low risk investment. Usually in the form of a money market fund or a stable value fund. Check with the plan administrator for a person to contact to help explain the various 401(k) investment options. Many companies are now using an independent adviser that consults with plan and offers their employees help with investment choices.

  2. Regarding 401K options: is it better to invest a lump sum once or twice a year (say, when you get your tax refund or a bonus check from work), or to invest $25 or $50 a week?

    Also, regarding what Andrew said, can your bank give you all the answers you need?

  3. Andrew Richardson

    I believe your bank should have the answers you need. 401K options are confusing, and can put your investments at risk.