A common financial planning strategy used when changing employers is to roll your old retirement accounts (ORP, 401a, 403b, 457b accounts) into a Rollover IRA, thereby consolidating your assets and increasing your investment options.
While there are many benefits associated with consolidating retirement accounts, some university-related retirement accounts have important ancillary benefits (such as subsidized retiree health insurance) associated with them that you’ll want to make sure you safeguard before proceeding with any rollovers.
Many people find their retirement savings stuck in workplace plans with poor fund selection, high expenses, poor customer service, etc. and wish they could roll their funds out into a new plan with more options. Until you turn 59 1/2, the age at which in-service distributions are permitted in most plans, there really isn’t much you can do if you are not satisfied with your current workplace retirement plan vendor(s).
If you’re thinking of leaving your current employer for a new institution, however, you’ll finally have the opportunity to roll your funds over to either your new employer’s retirement plan or a Rollover IRA. That said, just because you have new options doesn’t make it a no-brainer to roll your old accounts over. Always carefully consider the pros and cons before doing so.
The Pros of Consolidating Retirement Accounts
Some of the pros include:
- Convenience. The primary advantage of consolidating your accounts is simply the administrative convenience of having all of your accounts in one place to keep track of. One account is a lot easier to monitor and manage than 5 accounts with multiple retirement vendors from multiple employers.
- Freedom (IRA). If you roll your account into a rollover IRA, your funds will be free to roll over to any other retirement plan provider, should your new one turn into a dog.
- Lower Expenses. You can find rollover IRAs that offer ETFs and common stocks that have much lower fees than many of the investment options found in typical 401a, 403b, 401k, and 457 plans. (In particular, many university employees have old ORP and 403b retirement accounts with annuity companies that have high internal costs compared to their competitors. While these annuity companies have come up with cheaper mutual fund offerings to stay competitive, they may not go out of their way to move their clients’ funds to the cheaper option since the new options pay the advisor and the company much less. I recently met a prospective client couple with all of their assets at one of the annuity company retirement vendors and was able to show them that, while some of their accounts were in the cheaper mutual fund-based option, over 50% of their retirement accounts had been left in the old annuity-based option for years, charging them an extra 1% per year in associated M&E fees for no good reason since they didn’t need an annuity at this point in their lives. Don’t get me wrong, I am not saying that all annuities and annuity companies are bad. Some are an excellent solution for certain people in certain situations… but that is a topic for a separate article in the future).
- Delay Required Minimum Distributions (RMDs). Many university faculty love their jobs and plan on working into their seventies and even eighties. If you are approaching age 70 1/2 , are still working, and have multiple old 403b accounts, you will have to start taking Required Minimum Distributions (RMDs) at age 70 1/2 from those old plans, whether you’d like to or not. However, RMDs are not required from the 403b of your current employer, even of you’re age 70 1/2. So, if you’d rather not start taking RMDs, consider rolling as much of your tax-deferred assets (403b’s, 401ks, 457b, IRAs, etc.) as possible into your current 403b plan.
- To Better Work With Your Independent Investment Advisor or Financial Planner. Many university employees work with an independent investment advisor or financial planner to manage their investment accounts. While the firm I work with can directly manage both IRA/individual/joint/trust accounts and university-related retirement portfolios, many independent investment advisor firms either do not or cannot directly manage their clients’ university-related retirement portfolios. If you work with such a firm, rolling your accounts to a rollover IRA will enable your independent investment advisor to directly manage those retirement assets as well. Also, even with firms that do manage university-related retirement portfolios, certain plans allow for the deduction of advisory fees directly out of the account, while other plans do not, forcing the client to pay those fees out-of-pocket. Consolidating your university-related accounts in a rollover IRA will enable all advisory fees to be deducted out of the IRA, thereby eliminating your out-of-pocket advisory costs.
The Cons of Consolidating Retirement Accounts
Some of the cons include:
- Lack of Freedom (New Employer’s Retirement Plan). If you roll your old employer’s retirement plan into your new employer’s retirement plan, it will be stuck there until you reach the age of 59 1/2 or leave that employer.
- Fewer Early Withdrawal Options. 403b plans allow tax-penalty-free withdrawals for those age 55 + who have separated from service from their employer, and 457b plans allow tax-penalty-free withdrawals for those of any age who have separated from service from their employer. So, if you’d like the potential option of withdrawing money from those accounts before age 59 1/2, you should leave them where they are.
- No Stable Value Fund. A stable value fund is a unique investment option usually only found in work-related retirement plans, not usually in rollover IRAs. Particularly in todayslow-interest rate environment, having a stable value fund that pays much more than a money market is a great tool to have in your investing toolbox. I oftentimes advise clients to leave just the cash-equivalent portion of their investable assets in their old employer plan with in its stable value fund.
- Old Annuity Fixed Accounts With High Minimum Guaranteed Rates. Many senior facultyhave old annuity-based retirement accounts that have fixed accounts with minimum guaranteed rates of as much as 4%. These are accounts you do not want to part with lightly, particularly in today’s low-interest rate environment! As with stable value plans, I will oftentimes advise clients to leave just the cash-equivalent portion of their investable assets in an old employer annuity fixed account paying a good rate.
- No Loans. You may want to leave money in your old accounts if you think you may have a temporary need for cash at some time between now and retirement. For example, you may be leaving the university to start your own company and might need a quick loan to get you through the first year or so. Many university-related retirement accounts like 403bs allow you to take a loan of up to 50% of your account value at a competitive interest rate that you agree to pay back over a set period of time. And since you are simply borrowing your own money, if for some reason you cannot repay and end up defaulting on the loan, the loan amount will be considered an early-withdrawal, subject to income tax and any early withdrawal tax penalties, but it will not affect your credit.
- Your old employer’s retirement plan may simply be better overall than your new employer’s retirement plan. In terms of fund selection, expenses, customer service, etc.
Leaving UNC & Ancillary Benefits – Beware of Losing Your Retiree Health Insurance Benefits When Consolidating Accounts!
Sometimes important ancillary benefits are attached to your work-related retirement plans and may be jeopardized if you roll your money out of your current employer plan.
A prime example is the UNC ORP Retiree Health Insurance. The UNC ORP website states, “If you withdraw, transfer or rollover your entire ORP account, you will forfeit your right to the State’s retiree group health plan coverage.”
That being said, according to UNC HR Benefits, in order to start and remain on the UNC ORP Retiree Health Insurance, you merely need to be retired and be receiving a monthly payment from your ORP plan vendor. There is no specific amount that you need to be receiving. You just need to be receiving a monthly payment from your ORP plan vendor.
So, for UNC clients for whom it makes sense to roll their retirement accounts to a rollover IRA, I advise them to start an immediate annuity for the smallest amount possible with TIAA CREF (regardless of their current retirement vendor). It may only pay the client $25 per month, but it will be a monthly payment that will be guaranteed for life, thereby never threatening that UNC ORP Retiree Health Insurance. We then roll the remaining assets over to the rollover IRA once the immediate annuity has been established.
(A similar thought process applies to those thinking of taking a lump sum distribution form the TSERS pension plan.)
To summarize, you should never roll your entire balance out of your UNC ORP plan!
The Bottom Line
Of course, I haven’t covered all of the reasons why you may or may not want to consolidate your retirement accounts after changing institutions. As with all financial planning decisions, it’s complicated.
Make sure to carefully analyze your particular situation… your particular old employer retirement plans versus your new employer retirement plans versus your rollover IRA options… before you make any final, irrevocable decisions.
Feel free to contact me if you have any questions.
*This article was originally published 04/01/16 and was revised 08/01/2018.