Beware of Retirement Sprawl

Over time, your investment objectives and risk tolerance may have changed. Thus, it may be difficult to maintain an effective retirement investment strategy—one that accurately reflects your current goals, timing and risk tolerance—when your savings are spread over multiple accounts. 

Often, 401(k) plans, other employer-sponsored retirement programs and even some IRAs have limited investment menus. Some IRAs may offer greater control, more options or expanded diversification when compared to employer plans and other IRAs, but on the other hand they might not offer the same options. Whether a particular IRA’s options are attractive will depend, in part, on how satisfied you are with the options offered by your former or new employer’s plan.

It is typically easier to monitor your progress and investment results when all your retirement assets are in one place. By consolidating your retirement accounts, you will generally receive one statement instead of several. 

Some employer plans also provide access to investment guidance, planning tools, telephone help lines, educational materials and workshops. Similarly, IRA providers offer different levels of service, which may include full brokerage service, investment advice and distribution planning.

Reducing the number of accounts may impact account fees and other investment charges. Both employer-sponsored qualified plans and IRAs have plan or account fees and investment-related expenses. However, in some cases, employer-sponsored qualified plans may offer lower-cost institutional funds, and  may pay for some or all a plan’s administrative expenses, where permitted. Generally, fees associated with an IRA may be higher than those associated with an employer’s plan but consolidating multiple IRAs may reduce your overall expenses.

Generally,  distributions taken by an individual from certain employer retirement plans and IRAs prior to reaching age 59 ½ are subject to a 10% early withdrawal penalty tax, unless such distribution satisfies an eligible exemption to the early withdrawal rules. Qualified plan participants between the ages of 55 and 59 ½, once separated from service, may be able to take penalty tax-free withdrawals from the qualified plan.

Individuals, once they reach a certain age, must usually begin taking required minimum distributions (RMDs) from their retirement accounts. The age at which an individual must start staking RMDs (“RMD Age”) depends on their date of birth (e.g., if born after 1950, but before 1960, RMD Age is 73).² Having fewer retirement accounts to manage can mean having fewer RMDs.

However, you should also note that if the plan permits, qualified plan participants can delay taking required minimum distributions after reaching RMD age if they are still working for the employer that sponsors the plan and do not own more than 5% of the company.

If your employer-sponsored retirement plan is terminated or abandoned (an “orphan plan”) or is merged with or transferred to a retirement plan of another corporation after you leave, it may be difficult to locate the plan administrator to request a distribution of your benefits or to change investments. By contrast, locating your IRA provider to change your investment strategy or to take a distribution is generally not an issue.

Once you reach retirement, you’ll need a strategy for turning your savings into income in the most efficient way possible. Making withdrawals from one account, rather than many accounts, may make this strategy easier to execute.

There are, of course, some situations where you may not want to consolidate. For example, while many qualified plans allow for loans, you cannot take a loan from an IRA. Thus, once you roll over a qualified plan into an IRA, you no longer have the ability to take a loan. However, once you leave the company sponsoring the employer plan, you may not be able to take a loan out anyway, since few qualified plans allow loans to be taken out by former employees.