7 Considerations When Consolidating Multiple Retirement Plans

Damian Winther, CFP® CSRIC®
May 1, 2019 11:17:32 AM

multiple retirement accountsIf you are like most of the United States population, chances are you’ve held several jobs over the years, which may have resulted in multiple workplace retirement plans that have been sitting dormant, neglected and possibly unbalanced. Have you considered consolidating your retirement plans in order to have a more clear understanding of your overall financial picture and portfolio allocation?  Are changes needed in order to increase your return potential and/or reduce your downside risk?

These are just a few of the considerations that should be taken into account when properly planning for your future. When creating a comprehensive financial plan, you’ll want to take into account all investment accounts, assets, liabilities and cash flow, in order to design a flexible plan that can help you achieve your long-term goals.

In a study conducted by The Bureau of Labor Statistics (BLS), it was reported that younger baby boomers (born between 1957 and 1964) held an average of 11.9 jobs between the ages of 18 and 50. Considering the fact baby boomers account for roughly 23 percent of the United States population1, there is a good chance that a significant amount of cash and investment are not being managed, given the unique nature of each individual’s goals and risk tolerance thresholds.

So why might you consider consolidating your various retirement plans into a single account, such as an Individual Retirement Account (IRA)?  There are several reasons why this may make sense and here are a few considerations you may want to take into account:

  1. Fiduciary Capacity – should be taken into account at all times.  At Birchwood, we believe it is imperative that Advisors and Money Managers act as Fiduciaries, which means putting the client’s interests first. Surprisingly, this isn’t always the case!  
  2. Rebalancing & Tracking – consolidation may help to make portfolio tracking and rebalancing easier to manage. If you have several different retirement plans, do you know what your true asset allocation is?  At Birchwood, we believe in strategic asset allocation, which involves managing an investment portfolio based on a target allocation. Periodic rebalancing is needed in order to capitalize on the upside while simultaneously helping to reduce downside risk.  
  3. Fee & Expense Considerations – should be taken into account for owners of multiple retirement accounts. Chances are the fees you are currently paying are not only hard to decipher, but may be unknown. History has shown us that advisory fees, commissions and trading costs tend to vary considerably from one institution to another. We encourage our clients to be good stewards of their money and one area they can accomplish this is having a sense for what they are paying and what services they are getting in return.
  4. Investment Options – retirement plan providers often have a suite of investment plan options available to plan participants.  It’s important to recognize what investment options are available within your retirement plans as you may be missing out on certain asset classes or sectors of the market.  One of the keys to a long-term investment strategy is diversification.
  5. Managing Required Minimum Distributions (RMD) – did you know that you are required to begin taking money out of your tax-deferred retirement plans (401k’s, 403b’s, 457 plans, IRA’s, etc.) starting April 1st following the year you turn 70½?  Do you have a sense for whether or not you can aggregate your RMD from different retirement plans? There are several variables that have to be taken into account once an individual needs to begin taking RMDs and we highly recommend working with a financial professional so that mistakes can be avoided. The penalty associated with a missed RMD is 50 percent of the amount that should have been taken. This is in addition to the tax consequences of taking the RMD during the year. Bottom line, mistakes can be very costly!
  6. Ability to Access Money Before Retirement – if you think it’s likely that you will need access to money before retirement, consider leaving it inside your workplace retirement plan, as some 401ks allow for loans to be taken. Another consideration is retirement or separation from service after age 55, which often gives plan participants access to their money without the 10 percent early withdrawal penalty.   
  7. Employer Stock – held inside a retirement plan can present a very unique opportunity following retirement or separation from service, known as Net Unrealized Appreciation (NUA). This strategy gives investors the ability to roll the stock portion out of the retirement plan into a non-qualified brokerage account.  Ordinary income tax is due on the cost basis of the stock and future appreciation is treated as long-term capital gains. Note, for NUA to be done properly, several requirements must be met, one of which is that 100 percent of the vested retirement plan assets must be distributed (or rolled to an IRA) within one calendar year, including the NUA portion that is distributed as shares into the non-qualified brokerage account.  

We suggest working with a Certified Financial Planner™ Professional in order to fully understand the consequences associated with consolidating various retirement plans.  Given the common mistakes many investors make when implementing this on their own, careful consideration should be given to the pros and cons associated with the multitude of consolidation strategies.


1 Source: Knoema, US Population by Age and Generation https://knoema.com/egyydzc/us-population-by-age-and-generation

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Topics: Retirement

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