One nest is best: Consolidating 401(k) and IRA accounts recommended

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It is not uncommon to wind up with multiple 401(k)s after switching jobs a few times during the course of a career.

Companies usually allow employees to leave their money in the plans even after they leave the company, although non-employees are not allowed to make contributions.

But many financial advisers say it could be better to combine old company retirement accounts into a single 401(k) offered by a current employer or roll all of the old accounts into an IRA.

"We actually see this quite a bit," said Dawna Kopko, a senior investment adviser at PNC Wealth Management, Downtown. "Someone could have five or six different 401(k) accounts invested in different ways that do not work together for their long-term plans.

"It comes down to asset allocation, which is the mix of stocks and bonds in a person's investment portfolio," she said. "An individual with multiple 401(k)s with different companies may wind up at age 65 without the investment mix that they really need."

At a time when workers are becoming responsible for funding their own retirements through company 401(k)s or IRAs, they also find themselves more vulnerable than ever before to being downsized, outsourced or forced to take early retirement -- all of which may cause them to change jobs frequently.

The U.S. Department of Labor's Bureau of Labor Statistics has found that the average person born in the latter years of the baby boom (1957-1964) held 11.3 jobs from age 18 to age 46.

Although job duration tends to be longer the older a worker is when starting the job, the federal government found the baby boomers in the national longitudinal study continued to have large numbers of short-term jobs even at middle age. Among jobs started by 40- to 46-year-olds, 33 percent ended in less than a year and 69 percent ended in less than 5 years.

Chris Chaney, vice president of Green Tree-based Fort Pitt Capital Group, said he also has found that high achievers can be so focused on their careers that when they are given a new employment opportunity with a different company, they may forget to rollover the retirement assets they worked so hard to build with their previous employer.

"We often find that these people have assets in a number of different accounts, sometimes with a number of different firms," Mr. Chaney said. "This can make managing their retirement portfolio difficult, regardless of how experienced they are as investors.

"The result can be a hodge-podge of holdings strewn across a bunch of accounts, often with unsuitable investments that reflect past trends or concerns," he said. "Ironically, this is almost exactly opposite to the careful, considered approach that makes them successful in their professional endeavors.

"Worse, they end up neglecting the wealth they are working to build, the very thing they are counting on to support them when they retire."

Most financial advisers recommend consolidating scattered 401(k)s not only to manage them better, but also to establish a strategy based on their current needs and goals and the market today, rather than one that reflects their past views or the limited options they might have for investing in an old company 401(k) plan.

Robert Fragasso, chairman and CEO of Fragasso Financial Advisors, Downtown, said the fees charged by an IRA are likely to be lower than the management fees charged to accounts in a company 401(k) plan. An IRA will probably have more investment options than a company 401(k), and having one IRA allows the investor to focus on the portfolio's allocation, rather than have multiple uncoordinated accounts.

"No matter how large the range of choices in any 401(k) plan, the number is dwarfed by the range of choices available to the individual investor in an IRA rollover," Mr. Fragasso said. "There is, thusly, the opportunity in the IRA rollover to scour the world for the best mutual funds to use as well as individual securities, if appropriate."

One disadvantage of consolidating multiple 401(k)s to a single IRA is that in many states, money in an IRA does not receive the same protection from creditors and lawsuits that 401(k) plans receive. This could be an issue for people working in professions -- such as medicine -- that tend to attract lawsuits.

But Jon Grossman, an associate at the Downtown law firm Tucker Arensburg, said Pennsylvania has among the strongest protections for IRAs in the country.

"There are many considerations an individual should take into account when deciding to roll money from a 401(k) to an IRA," Mr. Grossman said. "In Pennsylvania, individuals have one less thing to worry about. Pennsylvania laws provide significant protection from creditors and lawsuits for IRA account owners.

"Your retirement funds get just as much protection inside an IRA as you would get if it was in a qualified company-sponsored 401(k) plan."

Ms. Kopko at PNC Wealth Management said the average investor would reap the biggest benefit from consolidating 401(k)s in the reduction of management fees. Most financial institutions, she said, have breakpoints in the fees they charge to manage an account based on the amount of assets under management.

"That means if you have five $100,000 accounts as opposed to one $500,000 account you will likely pay more fees for the multiple accounts if they are scattered," she said. "Also having one account will help the family if something happens to the individual.

"There are steps family members have to take for an inherited retirement account and consolidation will also ease those headaches."

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Tim Grant: tgrant@post-gazette.com or 412-263-1591.


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