Understanding Your 401k Rollover Account

It's not always easy to understand the workings of the financial world. The forms, the jargon, the numbers can all seem to swirl around in your head. One of the most misunderstood financial tools is the 401k retirement account and one of the least understood subsets is 401k rollovers. This article will explain the 401k rollover account.

I hear this a lot -- what's the point of bothering to save for retirement? What's the point of moving my 401k to the new job? First, there are about 1.5 million good reasons to save for retirement! If you start early and go slow and steady, you will save for retirement without really straining. If you can set aside $100 a paycheck starting when you are 25, compound interest and dollar cost averaging are going to help you have a tidy nest egg for your golden years. Sure, Social Security might not be around when you need it, and that is all the more reason to be serious about saving money. Trust me, as age 50 looms closer, you will begin to think about retirement. It might not be that you want to stop working but you may not be able to work. How many 80 year olds do you see punching the clock every day? The odds are that you will live to see 80 or 90, or if you are in your 20s and reading this, you will probably live to be 100. You are going to need some cash to see you through.

Now, the second part of that statement, What's the point of moving my 401k to the new job? The 401k rollover is a vital tool to help with retirement saving. Think of your money as energy. You want all of your energy pointed in the same direction, working in harmony. You don't open a door with one hand and hold it closed with the other -- you can't get anywhere that way! Having multiple 401k accounts is not actually that different. A 401k plan rollover helps you get all of your money focused on the single goal of growing. Having all of the money in one place, managed under one roof has lots of advantages. Read on and find out more.

There are so many funds out there. How do you find the right one? Your employer will have chosen an overall firm to handle your 401k account. There are hundreds and hundreds of different firms. The one you will work with probably depends on many factors, mostly having to do with the size of your company. Some 401k funds are specialized for smaller businesses or certain kinds of businesses. What matters to us is what choices you have within the fund. And this is where the options can become overwhelming. Index funds, small cap, blue chip, emerging markets, money markets.....

There are some great blogs and books out there to help you make the right choices on how to allocate your money. Part of how you allocate will depend on your age. If you are under 40, there is no reason for you not to take some risks. If you put all of your money in a money market account, where it will earn 1% interest (right now the interest rates are absurdly low), your money will grow so slowly that the growth will seem invisible. If you put the money in the stock market, it will be more volatile, but over time, it will average out and you will see average gains closer to 12% on your money. One year, yes, you might see a 2% growth in the stock market, but another year it will be 20% and over time, that is going to even out. If, however, you are 3 or 4 or even 5 years from retiring, you have to put the bulk of your money into a money market. As we have seen so clearly in these last two years, the market can fluctuate and it takes time to recover. Recover it will, but it takes time and if you are two years from retiring you don't have time to let the market recover. You need to protect your assets. 

When you change jobs, or if you lost your job, you will make use of a 401k rollover account. Opting to move your 401k account is a simple matter. For most companies your Human Resources department will hand you a single page form. You simply say where you want the money to go -- where the money needs to end up -- and sign the form. Done! If you are transitioning to a new company, this is all very simple. The old company will send the money to a holding account until they settle out on the matching funds and any outstanding fees. Once that is done, the money flows into your new fund and you again make the choices about how to allocate the funds within this new 401k account. The names might be different and you may have a few more options, or fewer options on where to put the money, but in general any managed account is going to have blue chip funds and index funds and socially responsible or Green funds.

If you are laid off or making the leap to being self employed, you can certainly roll the money into an IRA (individual retirement account.) 401k rollover IRA or 401k rollover Roth is just a simple as any other rollover.

The nuts and bolts of where the money goes and for how long depends on many factors. As I said earlier, your money may sit in a transition account waiting for your former company to calculate the matching funds owed to you. People don't realize but matching funds are usually added one or twice a year. The paperwork necessary to match funds every single paycheck would be crippling. Easier for the company and the fund manager to do it a few times a year.

You do not have to wait for final transfer to decide how to allocate the funds in your new account. You can make those choices and when it is ready, they will be executed. If you are moving to an IRA or Roth account, you are going to have a lot more choices and a lot more fees. Think about it: you have all the possibilities of the firm at your finger tips, but now you are a single person negotiating with a firm. Your bargaining power for how much the services cost you is now very small, because you are just you. The freedom of choosing which firm and what funds easily offsets the increased fee structure, but do be aware that you will bear these costs. The key here is to decide on funds and allocation and stick with them. Plan to review the fund (and the firm!) performance once a year or every other year and make changes accordingly.