401(k) Options When You Leave Your Employer


Regardless if you are retiring or moving to a new employer, once you leave your current job you will need to decide what to do with your 401(k). You have a handful of choices. I have outlined the benefits and disadvantages of each option below. Your personal circumstances may favor one option over the other. I highly recommend you discuss your options with your fee only financial advisor whenever you transition employment so he/she can help you determine which pathway provides the best choice for your unique financial situation.

1) If you have a balance of $5,000 or greater you can likely leave it in your current plan as most 401(k)’s provide a deferral option.

a) This is the easiest decision and likely no action is required on your part. Although, I am always amazed how many investors choose this default option when there are better choices as described below.

a) Every 401(k) plan has its own unique set of investment options. Your current plan may have a limited choice of investment options such as being overly U.S. centric. We live in a global economy and I believe portfolios should provide a decent amount of international options on both the stock and bond side of investment choices.
b) Many 401(k)’s have incredibly high internal expenses. It is not uncommon to see mutual fund choices with expense ratios north of 1.5%. It is very important to keep an eye on your overall investment expense exposure. The more you can lower your investment expenses, the higher probability you can keep returns compounding for your long-term financial benefit.

Be aware that if your balance is less than $5,000, you will want to take action on one of the below choices as your employer may have the option to automatically cash your 401(k) account out or transfer you to an IRA. Cashing your 401(k) account out can have large tax consequences as outlined later in this article.

2) Rollover your balance to your new employer’s 401(k) plan.

a) This is a good way to consolidate financial assets, especially if you have more than one 401(k) from past employment. I always favor consolidation and simplification where possible.
b) This could be a great choice if you have an excellent set of diversified investment options that are low cost.

a) It is not uncommon for your benefits department at work to occasionally choose a new custodian or a new set of investment options in your 401(k) every few years. You have less control in this situation as you are forced to invest in whatever options are provided. What may look great today could easily change unexpectedly.
b) Your new 401(k) may have poor investment choices, and/or investment options with high expenses.

Most 401(k) rollovers are initiated from the 401(k) you are leaving. Your human resources department or benefits office may require that you fill out a termination/rollover packet of paperwork. Some 401(k) custodians may take direction over the phone. Collectively you and your fee-only financial planner can determine what is the next step to move forward and he/she can help with completing any necessary paperwork.

3) Rollover your 401(k) to an IRA

a) This is typically my favored option. Once you set up an IRA you have the whole investment universe of options to invest in. This could be mutual funds, ETFs or stocks. It is easy to build a well-diversified portfolio when you have such a wide array of investment options to choose from.
b) You have control over your money. You can always move your IRA to another investment custodian if you prefer a change of investment options.
c) You will have control over investment expenses. There are a number of low cost investment options available via no-load mutual funds and ETFs at a number of investment custodians.

a) If you are still working, you may end up with one extra investment account in a separate IRA. This is a minor disadvantage. The benefits of investment selection and cost control provided with rolling your 401(k) to an IRA easily outweigh the disadvantage.

4) Cash out your 401(k)

a) None, other than liquidity if you are in a situation desperate for cash.

a) This is typically the worst decision you can make as any balance withdrawn is a taxable withdrawal. Your 401(k) custodian is required to withhold 20% in federal taxes, but your tax exposure could be higher depending on your marginal tax bracket.
b) You will owe state income taxes on the withdrawal if you live in a state that taxes income.
c) If you are under age 59 ½ you would also be subject to a 10% early withdrawal penalty.
d) If you have an outstanding 401(k) loan balance, the loan would also become a taxable event and be subject to the taxes and penalties described above.
e) You will miss out on any future tax-deferred compounded growth by cashing out your 401(k) today.

There are a couple of other scenarios to be aware of before deciding on one of the above choices:

1) What if you have a loan balance against your 401(k)?
a. You typically have 60 days to pay back a 401(k) loan after leaving employment. After 60 days, your loan balance will likely be considered a taxable distribution and you will be subject to taxes and possibly a 10% early withdrawal penalty if you are under 59 ½ years old.

2) What if you have greatly appreciated employer stock in your 401(k)?
a. You may have a tax preference option called Net Unrealized Appreciation or NUA which allows you to transfer the stock out of the 401(k) and pay ordinary income taxes on the cost basis and capital gains taxes on the gains.  You will want to review this option in detail with your financial advisor and CPA prior to making any decisions.

In closing, I highly recommend you notify your financial advisor of any employment changes which could impact your 401(k) options.  Once he/she is aware of your options, they can help you determine what the best course of action is for your personal financial situation.  Your financial planner can also join in a conference call with your benefits department and/or 401(k) custodian to make sure you both understand all of your options and what steps are required to move forward.

The Seven Benefits Of A Corporate Trustee

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If you have a trust, you likely have named yourself as the current trustee and your spouse or partner as the co-trustee. If you were to become incapacitated or die, your spouse or significant other would then serve as your successor trustee. But what do you do in the case where you or your successor trustee are not comfortable or capable serving in that role? An alternative is to name a corporate trustee. A corporate trustee is simply a trustee that is a professional institution/corporation instead of an individual.

The following are the key benefits of naming a corporate trustee to serve as the acting trustee, the co-trustee or the successor trustee of your trust:

1. Experience

The trustee of a trust is responsible for administering the trust account, ensuring the safekeeping of any assets in the trust, record keeping, accounting, monitoring and initiating distributions as outlined in the trust, coordinating and preparing tax documents, monitoring the investment manager of the trust assets and paying bills. A corporate trustee performs all of these tasks on an ongoing daily basis for perhaps hundreds to thousands of different trusts. Thus they have the capability, know-how, professionalism and process in place to handle these tasks if you or your proposed individual trustee does not have that same comfort or experience level.

2. Objective

A corporate trustee will follow the trust instructions exactly as they are described within the trust. This is part of their fiduciary responsibility to the grantors and beneficiaries of the trust. This avoids potential conflicts of interest between family members. I have seen numerous occasions when family all seem to get along until you put monetary assets in front of them. Some family members feel more favored then others and sometimes decisions are not always made that are in the best interest of the person they should be financially providing for.

3. Fiduciary Responsibility

Similar to a NAPFA Registered Financial Advisor, a corporate trustee has a fiduciary responsibility to any grantors (you, spouse or partner) and any beneficiaries of the trust. This means they must put your interests before their own. It is the highest level of trust, loyalty and care available in the financial industry.

4. Perpetual Life

A corporate trustee is typically a corporation with an ongoing time horizon. It will not become sick, incapacitated, or pass away while serving as your trustee.

5. Flexibility in Role

You can outline in your trust the exact role you would like the corporate trustee to fulfill. A corporate trustee can serve as the acting trustee, a co-trustee or the successor trustee.

6. Peace of Mind

Relieving your family and friends of the trustee burden will not only provide peace of mind to them, but also to you.   Knowing that your financial affairs are being handled in the most efficient and prudent manner with a professional team of administrators and advisors is many times well worth the cost of the service.

7. Coordinate With Your Financial Advisor

There are generally two types of corporate trustees: 1) those that serve solely in the administrative trustee role and 2) those that additionally manage the trust assets. If your financial advisor has a comprehensive understanding of your financial situation and they are already managing your portfolio, then you may want to consider hiring a corporate trustee that serves solely in the administrative role.   If you are working with a financial advisor affiliated with NAPFA, then the benefit to you is that you potentially would have two fiduciaries working as a team on your behalf, your investment strategy would not need to change and your accounts would not need to transfer when a trustee change is ready to be made.

How Do I Find A Corporate Trustee?

Your financial advisor and/or estate planning attorney are typically a good referral source for locating a qualified corporate trustee. Many financial advisors provide ongoing comprehensive financial planning, including advice regarding estate planning, and thus have a network of qualified referral sources to meet your specific needs.

How Do I Choose A Financial Advisor?

We believe that when choosing a financial advisor you should consider the following attributes:

1. Choose a financial advisor that is also a Certified Financial Planner (CFP®). This is considered the premier designation in the financial industry. A financial planner with this designation has passed a 10 hour board certified exam, has 3 plus years of financial planning experience and has an undergraduate degree. The curriculum for a Certified Financial Planner is based on comprehensive financial planning including many disciplines such as: investment planning, retirement planning, tax planning, insurance planning, estate planning and college planning.

2. Seek a Registered Financial Advisor that operates under a Fiduciary Standard vs. the brokerage industry’s suitability laws. A Fiduciary Standard is the highest legal standard of care available in the industry. See our article regarding “What is a Fiduciary and Why Does it Matter” for more information.

3. You should seek a financial planner that is compensated in a fee-only manner vs. one who sells financial products, insurance or annuities for commissions. See our article titled “What is the difference between Fee-Only versus Fee-Based?”, for more information on financial advisor compensation systems.

4. Choose someone experienced with clients similar to your type of financial situation.  Ask the advisor what their typical client is like, profession, total assets, life situation, advice needed, etc…

5. A financial advisor should be independent and not affiliated with any particular company or financial products. An independent financial planner has the ability to recommend what is in your best interest, not that which provides them with the highest commission.

6. Keep interviewing advisors until you find one that you feel you can trust. Hiring a financial advisor is a big decision and your financial future is at stake. Your relationship with your advisor should be based on trust and comfort.

7. Ask for a copy of your financial planner’s code of ethics to ensure their interests are the same as yours.

8. Beware of any promises made regarding performance or statements made regarding the ability to greatly outperform markets.

9. Ask your advisor if they are willing to put their fee structure, recommendations and any disclosures in writing. If not, that should raise a concern.

What is a Fiduciary and Why Does it Matter?

You may be reading this article if you are looking for a financial advisor but not quite sure which one to choose or what issues to consider before hiring one. A good starting point is to determine if your potential financial advisor is working under a fiduciary standard and legally bound to act in your best interest, or if he/she is working under a suitability standard, which is considered a lower standard of care.

Fiduciary standard of care versus suitability standard of care

The words “fiduciary” and “suitability” may be new to you, so let me provide you with an overview of each term as it relates to your investments and overall financial well-being.

Core ValuesIn the financial advice industry, the fiduciary standard is considered the highest level of care a financial advisor or financial planner can operate under. Under the fiduciary standard, your financial advisor has a duty of loyalty and care to you, is required to legally act in your best interest, and must put your financial interests above his or her own. This is similar to the same legal level of care you would expect from your doctor, lawyer or CPA. In addition, if there are any conflicts of interest, they must be disclosed in writing, along with any fees or compensation.

The fiduciary standard is aligned with Registered Investment Advisors (RIAs) who are licensed under the SEC or in their state of business. RIAs are governed under the Investment Advisors Act of 1940.

In contrast to the fiduciary standard, the suitability standard means a financial advisor can provide advice and financial products that are considered suitable for you based on a basic understanding of your financial situation. One of the key defining differences in this definition is that “suitable” means there could be better investment options, but what is being recommended to you meets a suitable or reasonable solution. For example, the financial advisor may have access to investment options that are lower cost, better diversified or pay a smaller commission to the advisor, but the advisor could choose to recommend the investment option that pays him or her a higher commission as long as the investment product was deemed suitable for your financial situation. I think you can see the potential conflicts of interest that could exist in such a scenario. Whereas the fiduciary standard requires that a financial advisor eliminate any conflict of interest, or at least disclose any conflict of interest in writing, the suitability standard has no such requirement.

Commonly financial advisors that are aligned with a broker-dealer and practice under the suitability standard are stock brokers, insurance agents or may work at a bank. They are licensed under a different governing body called FINRA.

How do I determine if my financial advisor is acting under a fiduciary standard or a suitability standard?

  1. The easiest way is to ask them directly. Will you be acting under a fiduciary standard of care and are you willing to put that in writing?
  2. Are you a Registered Investment Advisor (RIA)? Can I see your form ADV? The form ADV is the regulatory document under the SEC or their state of business that provides an overview of their RIA firm, services to be provided, fee structure and discloses any typical conflicts of interest.
  3. Another option is to ask them what types of securities licenses they hold. A financial advisor providing advice as a fiduciary is licensed as an RIA under the Series 65 license. A registered representative selling financial products under a suitability standard is typically licensed under a Series 7 (stock broker’s license) and/or Series 6 (mutual fund and variable annuities) license.

What about the new fiduciary regulation that was to go in effect on April 1st 2017?

Due to great consumer demand for working with a fiduciary, the Department of Labor created a law that was to go in effect beginning April 1st 2017 that would require all financial advisors working with IRAs or retirement accounts to provide advice under a fiduciary standard. Many are calling this “fiduciary lite” as it was not quite as stringent as the fiduciary standard that RIAs currently operate under. However, it was a much needed step in the right direction for the financial services industry. Unfortunately, the new presidential administration requested a hold on this new law and asked that it be further reviewed before being implemented. At this point we don’t know if it will be delayed for only a period of time, face changes prior to implementation, or be completely eliminated altogether.

So where can I find a financial advisor or financial planner that operates as a fiduciary?

The good news is there is a great option currently in existence that will allow you to work with a fiduciary based financial advisor – The National Association of Personal Financial Advisors (NAPFA), or www.NAPFA.org. On their website you can search nationwide for a financial planner that is near you. In full disclosure, I am also a member of NAPFA. One of the great things about NAPFA is all financial advisors that are affiliated with this organization proactively chose to act as a fiduciary for their clients. Not only do they act as fiduciaries, but they are also fee-only and do not sell any commissioned financial products. For more information on types of financial advisor compensation, please see my article titled “What is the Difference Between Fee-Only and Fee-Based?”

In conclusion, if you want unbiased and transparent financial advice, then consider working with a Registered Investment Advisor that holds themselves out as a fiduciary and is willing to put that in writing.


What is the Difference Between “Fee-Only” and “Fee-Based?”

Do you know how your financial advisor is compensated? Two common forms of financial advisor compensation are called ”fee-only” and “fee-based.” They sound very similar, but they have vastly different meanings. Whether your advisor is “Fee-Only” or “Fee-Based” can have a huge impact on the type of advice you are provided and the types of investment products which are recommended to you.

Let me provide a made up example related Coin stacks with letter dice - Feesto the medical industry to help differentiate the two fee compensation terms. Not everyone has worked with a financial advisor, but we all have visited a doctor.

Let’s assume you decide to visit your doctor because you have a health issue. Upon the visit, your doctor analyzes your health problem, provides you with a recommendation, possibly sends you to a specialist for further diagnoses, or gives you a prescription to take to your local pharmacy. In return for the doctor’s time and expertise, you likely paid him/her an out of pocket co-pay and/or your health insurance pays them a fee for your visit and any particular procedures or testing done. This scenario would be considered fee-only. You received a recommendation and the doctor received a fee.

Now let’s assume you visit your same doctor for the same health issue. But we further assume that the doctor’s compensation comes from two sources: 1) a fee for an initial assessment of your health issue and 2) the doctor also receives a commission for any particular health recommendation, procedure, referral to a specialist or pharmaceutical prescription sold. What if we take this one step further and also assume that not only does your doctor receive a commission for his/her recommendations, but that their commission based revenue can only come from a select group of products or procedures chosen by the health organization they are affiliated with? Do you see any potential conflicts of interest in this scenario? Would this cause you to question if you were receiving the best medical recommendation, or, if what your doctor recommended was potentially based on what paid your doctor the highest commission? This would be considered a “fee-based” compensation arrangement. The doctor receives a fee for the initial visit but also receives commissions for specific recommendations, procedures, referrals or prescriptions sold.

Consumers are fortunate the fee-based arrangement does not actually exist in the medical industry. However, it is common in financial services.

The two examples above can be directly substituted into the financial advice industry. Fee-Only means the only source of compensation your financial advisor receives is from fees paid directly to the advisor from clients. This could be in the form of an hourly fee, a retainer fee or a fee based on a percentage of the assets under investment management. Regardless of the type of fee, the point is that the client pays only a fee and no other type of compensation is charged. No commissions are received. No financial products are sold such as load mutual funds, commissioned based fixed and variable annuities, equity indexed annuities, whole life insurance or universal life insurance. The advice and compensation is totally independent of the financial products recommended.
Fee-Based is a term the brokerage and insurance community developed to counteract the success of the Fee-Only classification. The terms certainly sound similar and consumers are confused, so their strategy seems to be working. I can’t tell you how many times I have received a phone call from a consumer looking for a new financial advisor and one of the first things they say is that they are looking for a fee-based advisor. I always enjoy having that conversation and explaining the terminology differences as most consumers are greatly surprised.

Where Fee-Based can be confusing and potentially misleading is that not only does an advisor receive fees, but they can also accept commissions from financial products recommended such as load based mutual funds, or annuities and insurance. This system creates the potential for a huge conflict of interest. If an advisor, like the doctor above, has the opportunity to recommend a particular financial product that pays him/her a commission versus a financial product that does not pay a commission, do you think they could be incentivized and influenced to recommend the commissioned based product? Or, what if their product inventory only allows the choice between a select group of commissioned products based on the affiliation of their broker dealer? Would this raise a question – are the financial products offered to me what is best for my financial situation, and, do they make use of the best potential options considering the whole universe of financial products available?

No compensation system is perfect and free from all conflicts of interest. And certainly there are some great fee-based advisors doing amazing work for their clients. But we strongly believe the fee-only compensation method most closely aligns the interest of consumers with their financial advisor. We are proud and fortunate to belong to a great organization called www.NAPFA.org (National Association of Personal Financial Advisors), which represents a like-minded group of fee-only, fiduciary based financial advisors throughout the United States.

So when deciding which advisor you would like to hire, we would suggest that you ask how the advisor is compensated, request that they disclose their compensation in writing and look for someone who is paid as a “Fee-Only” advisor to eliminate as many conflicts of interest as possible.

Or, if you decide to work with a fee-based, commissioned advisor, at least look for one that is licensed under a fiduciary regulation. The fiduciary law requires that all compensation is disclosed in writing. Thus if you are going to pay commissions for advice and financial products, you will at least know what you are paying for. You can learn more about being a fiduciary by reading my article titled “What is a fiduciary and why does it matter?”