What to do with your 401(k)
Almost everyone has had the opportunity to contribute to their 401(k). There are 2 keys that you may have skimmed past during your employee onboarding we’re going to make sure you tackle here. On top of that, almost all HENRYs have left their 401(k) with their former employer. But just because you don’t work there anymore, doesn’t mean that money is not yours. This is how you you track it down.
Has the, “401(k)?! I don’t think I could run that far” joke run its course yet? Because we just added another pun to the mix and we’re only a little sorry about it.
The biggest 401(k) mistake you can make: not maximizing your company’s match
The biggest 401(k) mistake you can make is not maximizing your match. If your company offers a match, they are essentially offering you free money. You should really take free money. The average diversified portfolio goes up around 8% every year. If your company is offering to match whatever you contribute to your 401(k), they are essentially offering an immediate and essentially guaranteed (assuming immediate vesting) return on your investment.
Let’s assume you are offered a 100% match up to 5%. Saying no would be no different than if you went to Vegas, put $5K into a slot machine, pulled the handle, and were guaranteed to cash out with $10K. No joke. Not taking your employer up on their offer to match your contribution is turning down an instant return on your money.
Time is money. You’re not just getting an immediate return on what you’ve invested by choosing to max your match, you’re starting to earn compound interest way sooner as well. Ebanking agrees - going so far as to say, “And that’s exactly why you HAVE to max out your employer match. Sure, the immediate return is 100% as they’re giving you the same amount that you’re putting in, but the number actually grows to be much, much larger than that!”
What to do with your old 401(k)
Please do not roll your old 401(k) into your new 401(k)*. Hang in there, let us explain.
Part two of this series is on the downfall of rolling your old one into your new one. Listen, there are bigger mistakes in life than this - like that guy with around $200M worth of bitcoin who forgot his password. And granted, sometimes (on very very rare occasions) rolling your old 401(k) into your new 401(k) is the right move. But that’s hardly ever.
Here are two reasons why:
Limited investment choices
When compared with an IRA, a 401(k) typically limits your investment selection to a handful of options. According to Investopedia, the “marginal quality investment options” can be broken down into 5 categories: money market funds, core bond funds, large capital funds, small capital funds, and international funds. While the less-is-more mindset may help with decision-making, what good is it if your best option isn’t on the table?
Higher fees
Your 401(k) is an administered account. Administered accounts are typically run by a 3rd party (you and your employer being parties one and two in this scenario.) Because you’re bringing an external manager in, they want their cut too so typically you’ll incur higher fees than you would with an IRA.
How to get your old 401(k) back in your control
We know it’s a bit of a pain in the ass (and hey, if you’re a Stash Management client, we’ll do the heavy lifting for you), but most 401(k) providers require you to call in to a specific phone line. All you have to do is tell your old 401(k) provider you’d like to roll your 401(k) into an in-kind IRA. That means if you have a traditional 401(k), you’re going to roll that money into a traditional IRA. If you have a Roth 401(k), you’re going to roll it into a Roth IRA. Tax purposes. As of 2024, here are the biggest 401(k) providers and their direct lines:
Fidelity: 1-800-835-5097
Vanguard: 1-866-794-2145
Schwab: 1-800-724-7526
The second biggest 401(k) mistake you can make: not investing
Just because you’ve deposited money into your 401(k), it does not mean your money is invested. By not setting up elections properly (or at all), you could miss out on your chance to invest earlier in the game. A deposit does not mean your money is invested.
There’s a story about how a woman called the help desk at her brokerage firm wildly upset about why her account hasn't grown at all over 3 years - while the customer service advisor was trying his best to calm her down and explain how the markets go up and down, he pulled up her account and saw her original deposit was still sitting in cash. She hadn't selected what to invest in. Tough blow. Don’t be that woman.
So really you’ve walked away with three things not to do here. And if it would help to speak with a seasoned professional, we’ve got a few of those on hand in-house. Our financial planning process is called the Stash Plan. Check it out.
*The F Word is limited to the dissemination of impersonal and objective investment-related information [together with access to additional impersonal investment-related information and links.] The publication of The F Word on the Internet and the publication of any content should not be construed by any user and/or prospective user as Stash Wealth’s (i) solicitation to effect, or attempt to effect transactions in securities over the Internet, or (ii) provision of any investment related advice or services tailored to any particular individual’s financial situation or investment objective(s).
Stash Wealth provides financial plans designed to assist high earning young professionals build and manage their wealth.
Stash Wealth offers a pragmatic approach to financial planning and wealth management. Whether saving up for Tahiti or a Tesla, we help you achieve your short-term and long-term goals.
Written by Stash Wealth Staff Writer
Stash Wealth Staff Writers are knowledgeable about personal finance topics. Their objective is to unravel the complexities of finance trade jargon, products, and services in order to equip HENRYs with a sound understanding of financial matters.
