20 Reasons You May Want to Consolidate Your
Old 401(k) Plans and IRAs
By Jayne W. Di Vincenzo AIF®, CEP®, ChFC®
Fiduciary EDGE Advisors, LLC.
We help new clients clean up messes that result from having retirement plans that can spread out among as many as ten (10) or more different firms. This can make it very difficult to build and analyze their current financial wellness and create comprehensive financial plans.
Recently a situation like this reappeared and this got me thinking about all the reasons why it's a good idea to consider consolidating old IRAs and retirement plans with one advisor at one firm. Here are some of the main reasons I believe it is beneficial to simplify and streamline your scattered retirement accounts:
- Streamline record keeping. Instead of having 10 files in your drawer for various retirement accounts, wouldn’t it be nice to have one or two?
- Reduce the likelihood of making contribution mistakes. We’ve had clients inadvertently contribute the max to both their ROTH IRA at one place and a Traditional IRA at another firm in the same tax year because they weren’t tracking their finances closely and didn’t realize they couldn’t max out both.
- Reduce annual IRA fees. Rather than pay $10 here, $25 there, and $35 somewhere else for IRS reporting fees, why not just pay one single IRA fee each year? (In case you're wondering, the fee typically covers your firm’s IRS reporting costs.)
- Potentially save a lot of money. Most advisors offer lower advisory fees for accounts that meet a range of minimums. For example, $5,000 to $50,000 accounts may be charged 1.75 percent, and $50,000 to $250,000 may drop to 1.5 percent. Then, perhaps at $500,000, your advisory cost could fall to 1 percent, and so on. Ask your advisor what discounts you may qualify for with larger balances.
- Increased attention. Most firms offer scaled up services to larger investment accounts. If you consolidate you may find that you receive invitations to special events, add-on services and resources reserved for larger clients.
- Avoid over concentration. We often see clients holding various mutual funds and index funds with different sounding names that turn out to hold very similar, if not identical, stocks. Many clients are shocked at how poorly they are diversified once all their holdings are combined and analyzed. You wouldn’t know that without hours of pouring over prospectuses, fund reports, reading websites or calling fund companies directly.
- Increased choice. IRA accounts typically offer a large menu of investment choices – stocks, bonds, mutual funds, index funds, alternative investments and more. Most 401(k) plans have a small menu of options, and in many cases, may not offer important asset classes to maximize your ability to fully diversify your portfolio.
- Reduce tax preparation fees. By cutting the number of statements you provide your tax preparer to sift through you will both save on headaches, and perhaps even make them happier to see you every year and save you money on your tax preparation fees.
- Reduce the risk of an IRS penalty. Required Minimum Distribution (RMD) distribution and calculation errors incur an IRS penalty. Imagine tallying up RMDs from multiple statements and then contacting each firm to make sure you’re covered. Not how most of us what to spend a weekday or two. The current IRS penalty for a missed RMD is 50% of the amount not taken.
- Income planning. A streamlined IRA strategy makes it easier to determine the best sources of retirement income and when to tap into them. Considerations include income taxes, assets held both in and out of IRAs, portfolio diversification, short- and long-term financial goals, and expenses before and during retirement.
- Ease estate administration. Your heirs can get streamlined information from one source rather than having to track down multiple sources to ensure assets are all there – and that accounts and assets are not missed.
- Ensuring your beneficiaries are current. We have all heard stories of people receiving windfalls that they weren't intended to have, just because someone forgot to change his or her beneficiary. A smart financial advisor will update you on who you have listed each annual review to make sure your beneficiaries and trusted contacts are current.
- Introduce your beneficiaries to your advisor. With Zoom, this is easier than ever to do. If your advisor meets your beneficiaries, she will have an opportunity to educate them about how they can help you in the future.
- Performance tracking. When we ask clients what their average annual return has been on their spread around accounts they never seem to know. It’s difficult enough to monitor 2-4 accounts on your own but monitoring multiple accounts and weeding out poor performers is difficult to do unless you have a lot of time on your hands.
- Monitoring risk. Like asset allocation, it’s nearly impossible to calculate and monitor your portfolio’s risk if you don’t have accounts streamlined and all feeding into your advisor’s portfolio monitoring tools. I’ve lost count of how many times someone says they are aggressive, and we discover their investments are very conservative, or they share they are risk-averse, and we discover they have very aggressive investments.
- Financial wellness. Easily track your total net worth and progress on your financial plan. It is difficult to tell a client when they can retire, how much they can spend, and advise them on their overall wellness if you don’t have accurate and current information on all their retirement resources.
- Every year we meet new clients who have been locked out of old employer accounts and as a result, they’ve been too busy to bother with the hassle of calling 800 numbers to regain access. And then, they often await a PIN code to be sent snail mail to get back in. Delays, delays and more delays. As a result, they stay out of the loop for long stretches of time. I can’t tell you how many times we’ve onboarded a new client who for one to two years afterward is “finding” old accounts they’d forgotten.
- Mailing address. When you move – and many retirees are downsizing and moving near children or other family members - is all your mail really finding you? I doubt it. Even I’ve had mail show up from random vendors years after I’ve lived somewhere when someone was kind enough to forward mail. Are you contacting each firm holding assets for you to make certain all have updated your mailing address?
- Health emergencies. Should dementia or another illness strike that impacts your ability to handle financial affairs is the person who picks up the pieces going to understand your financial picture if there isn’t a single source of all your information? Consider how difficult piecing things together can be for the ones you’ve entrusted to help you when you’re not able to help them.
- Behavioral coaching. Many investors don’t realize how easily they can succumb to fears and biases they aren’t even aware they have. An insightful, caring financial advisor can help you frame markets, risks and opportunities and help guide you to making rational vs. emotional financial decisions. A 14+ year study by Vanguard found that investors working financial advisors averaged 3% better returns per year, and a portion of that return was due to helping clients not hurt themselves. 1
Are there any downsides to consolidating 401(k) plans and IRAs? You can't borrow against an IRA, but you can often do so against your current employer's 401(k). But that's not something you ever want to do anyway. Most states now have laws protecting IRAsfrom creditors, just as they do for 401(k) plans.2
There are at least 20 good reasons to consider simplifying your – and your family’s and advisors - life.
Jayne W. Di Vincenzo AIF ®, CEP ®, ChFC ®, CEO, Fiduciary EDGE Advisors, LLC Savannah, Georgia works with clients throughout the United States on building and preserving wealth and planning for their retirement, golden years and their heirs..
The information in this material is not intended as tax or legal advice. Please consult legal or tax professional for specific information regarding your individual situation.
2Check with your state rules on the protection of IRA accounts in your state from creditors.