How to Deal With Changes to Your 401k

My firm is going through a bit of transition at the moment.  As one of the many changes that are coming, all employees just received notice that the company will no longer match 401k contributions.  This spawned a few questions from my coworkers on what we should do with our 401k accounts. Here’s some of the advice that I gave.

Why the Match Is Important

According to, about 40% of companies that offer a 401k match contributions. A fixed match is most common, which usually involves something like $.50  for every  $1 up to a specific percentage of your salary (e.g., 4-6%).

In other words for every dollar that you contribute, your employer also adds 50 cents to your account just because you contributed. If your salary is $60,000 and your match is up to 6% of your salary, your employer just gave you $1,800 (($60,000 * .06) *.50) to help you save for retirement. That’s free money and a 50% return that you can’t replicate anywhere else.

If you’re lucky enough to work for a company that does offer a 401k match, you should take advantage of it by contributing at least to the specified match percentage.  Whether you should contribute more depends on a couple of other factors.

Assessing Your 401k

Even if your employer doesn’t match your 401k contributions, a 401k may still be essential in building a successful retirement.  401ks have several advantages over an Individual Retirement Arrangements (IRAs) including higher contribution limits, no income limits, and you can borrow from it if need be.

However, it’s important to review the details of your 401k plan. I’ve already discussed combing your annual statement for your plan administration fees and fund expense ratios. If you work for a large company and are paying over .75% in total or 1.5% for a smaller company (unfortunately they have less leverage), it’s time look at your other options.

Sites, like Brightscope or America’s Best 401k, provide plan ratings and fee comparisons between many 401ks.  If you discover that your 401k charges you high fees, try contacting the committee or person responsible for managing the plan to have it changed. Our firm did that exact thing when we found out that each participant was paying over 2.25% for their account.

What to Do If Your Plan Stinks

If you find that you have a lousy 401k with bad investment options and high fees (and you’re not inclined to sue your company for breach of fiduciary duty) you still have several options to help build your nest egg.

First, if you’re married, compare your and your spouse’s 401k to see who has the best plan. You can then pool your resources and strategize which one to max out first. You can also adjust your combined asset allocation to where you can use the lowest costs mutual funds in the higher-fee plans. In the event of a divorce, marriage protects spouses from one person running off with all of the money in his or her retirement account, unless you specify in a prenuptial agreement that they are separate property.

Second, consider contributing to an IRA initially and using the 401k for any overflow. You’ll be able to find many providers that can give you low costs and diverse investment options.  Even if you run into income limits, you may be able to get around them by taking advantage of a backdoor Roth.

Lastly, you also may find that your company offers a self-directed brokerage option or “brokerage window” which may allow you more control over your fees and investment options. Be forewarned that if you’re not experienced in picking investment vehicles, you may find this option overwhelming.

Making the Switch

If you’re in a situation like some at our firm where you’re looking to move your 401k entirely, you have to keep a few things in mind.

In general, you can only move your account if you’re no longer working at the company.  Some plans offer in-service rollovers, but it’s usually for those who are 59 ½ or a specified retirement range. You’ll have to look at your plan details for your particular options.

If you know your leaving, you have four options:

  • Leave the money in your old 401k
  • Roll it over to your new employer’s plan
  • Roll it over to an IRA
  • Cash out the account.

The fourth option will be costly based on the taxes and penalties alone. Leaving it with your old employer may also hurt you since you won’t be able to contribute more money to the account, you may have limited investment options, and you may be charged an extra maintenance fee since you’re not an active employee.  But it may be a good place to park your money while you figure everything else out.

When considering a rollover, perform a proper assessment of the fees and make sure that it’s a trustee-to-trustee rollover to avoid any possible unintended tax consequence.

Job transition is never easy. Hopefully some of this advice can help take some of the stress off of what to do with your retirement money when change happens.