What to Do With Your 401(k) When You Retire

For many employees, what to do with a 401(k) plan at retirement has been a foregone conclusion: Roll it over. Financial advisors no doubt have reinforced that trend, with rollovers from 401(k)s to IRAs bringing a juicy source of advisor revenue year after year.

That trend may be reversing, however. Forty-two percent of defined-contribution plan participants remained in their plan three years after retirement, according to a study from J.P. Morgan. That was more than double the percentage of retirees who had stayed put a decade earlier. A recent Pew survey identified a similar trend, with 35% of near-retirees saying that they planned to keep their assets in the plan following retirement. Participants cited quality of investment options, low fees, and convenience as the chief reasons for staying put.

The opportunity to hang onto assets after employees retire—and in turn keep costs down for the whole plan—isn’t lost on defined-contribution plan advisors. In a 2021 Pimco survey of retirement plan consultants and advisors, 36% of firms said they were actively encouraging participants to stay put in their plans following retirement. That was a dramatic increase from 2015, when just 14% of the firms in Pimco’s survey said they were actively attempting to get participants to stay behind. Relatedly, Pimco’s most-recent survey of retirement plan consultants showed that plans were adding features to better retain and serve retirees, including educational offerings, “roll-ins” (allowing outside assets to come into the plan), and personalized advice.

Ultimately, the decision about whether to stick with a 401(k) plan through retirement depends on a lot of different factors: the quality and flexibility of the plan, first and foremost, as well as the retiree’s own particulars. If you’re pondering whether to leave the assets behind or roll them over for retirement, here are the key questions to ask, listed in order of importance.

1. What’s the quality of the 401(k)?

This is THE key question when deciding whether to leave assets in a plan or roll them over. You should assess the quality of the plan on three key metrics: quality and breadth of the investment lineup, investment fees for the fund options in the plan, and any administrative fees that the plan levies on its participants. Morningstar ratings and data are invaluable when assessing investment options, though you may have to do some additional sleuthing if your plan includes collective investment trusts rather than mutual funds that are open to the public. While very low-fee funds were a big selling point for some 401(k) plans in the past, the accessibility of ultra-low-cost exchange-traded funds and index funds has made that less of an advantage relative to IRAs over the past few decades.

Be sure to pay close attention to the types of investments on offer, too, especially if the 401(k) will be your main or sole account for retirement. Investment types like short-term bonds, Treasury Inflation-Protected Securities, and cash surrogates like stable-value funds are apt to play a bigger role in your in-retirement portfolio than they did in your accumulation years.

Gauging any administrative expenses that you might be paying is trickier than getting your arms around investment-specific costs. Fee setups vary and there’s no single location for the information. A starting point, though, is your plan’s annual report (Form 5500). In it, you may see your plan’s administrative expenses expressed as a dollar amount. You’ll then need to divide that dollar amount by the total assets in the plan to arrive at a percentage. Given that you can generally get away from additional administrative expenses in an IRA, my bias is to be very thrifty on this front. If your plan is charging more than 0.25% per year, that’s a big headwind for your 401(k) portfolio versus an IRA.

2. Do you need early access to your funds?

If you’re a young retiree and need access to your money before the age of 59.5, staying put in the 401(k) plan may be the most practical course, even if the 401(k) isn’t all that great. That’s because investors in 401(k) plans who have left their employers can tap their assets a touch earlier without penalty—at age 55—versus age 59.5 for IRA investors. Just be sure you’ve fully assessed your portfolio’s long-run sustainability before contemplating withdrawals at such an early age. Also note that some 401(k) plans don’t allow the age 55 withdrawal option. In instances when the 401(k) is truly poor, you could leave the funds behind for withdrawals up until age 59.5, then roll the assets into an IRA after that.

3. Does the plan allow flexibility over withdrawals?

Another key issue—and one that tends to be quite under-discussed—is how much flexibility the 401(k) participant has over withdrawals. Specifically, some plans may not allow retirees to pick and choose which investments they tap for withdrawals but instead require them to take distributions pro rata from all of the holdings in the account. That lack of flexibility can be a major disadvantage for retirees who would like to use their withdrawals to help keep their asset allocations in line with their targets on an ongoing basis. By contrast, IRA withdrawals aren’t governed by pro rata rules, giving retirees more latitude to manage withdrawals in a way that aligns with portfolio strategy. If retirees were taking a buy-and-hold approach and using rebalancing proceeds to create cash flows, for example, they’d be able to pull withdrawals exclusively from bonds and cash when their equity holdings are in the dumps; they’d extract money from equities only after robust stock market rallies.

In a similar vein, if the plan offers traditional and Roth options, the participant may not be able to choose which account to pull from; distributions may have to come out pro rata from both account types. In other words, retirees who would like to practice tax-efficient withdrawal sequencing may not be able to do so in the 401(k).

4. Do you need creditor protections?

Legal protections are another reason to consider staying put in an old 401(k). Although laws regarding creditor protections for retirement assets vary by state, company retirement plan assets generally have better protections from creditors and lawsuits than do IRA assets. Obviously, these protections will be a bigger consideration for those who have had credit or bankruptcy problems, or work in a profession where there’s a possibility they could be sued.

5. Is employer stock/net unrealized appreciation in the mix?

Another consideration comes into play if you have company stock in your 401(k). In that case, staying put is often a better bet than rolling the money over. The reason is that if you have company stock in a company retirement plan, you’ll pay capital-gains tax on any appreciation over and above your cost basis when you sell the shares. (That differential is called net unrealized appreciation, or NUA.) If you roll over the company stock into an IRA, on the other hand, you’ll pay ordinary income tax on the distributions. If this situation applies to you, check with a tax or financial advisor to help determine the best course of action.

6. Do you need the guardrails?

Finally, a little bit of introspection is in order. Keeping the money in a 401(k) plan provides at least a few safeguards that aren’t there with an IRA. After all, these plans are overseen by fiduciaries who are legally required to look out for participants’ interests, so the funds in the lineup tend to be well-diversified and vanilla—not the type of investments that usually blow up portfolios.

That’s not to suggest you can’t emulate the simplicity and sensible approach of a 401(k) on your own, however. You could simply buy a good-quality target-date fund in an IRA, or construct a simple portfolio along the lines of my model portfolios.