Contributing to a 401k has become a key retirement strategy, especially with pensions on the decline. And since it’s likely you’ll work at multiple companies over the course of your career, every time you switch jobs you’ll likely enroll in a new plan. But when you move on to a new company, what should you do with the 401k at your previous employer?

Many people simply leave their old 401ks behind—and that’s actually the worst choice you can make. Aside from the challenges of managing a retirement portfolio that’s spread across multiple plans, you’ll end up stuck with the limited investment options your previous employer offered, paying high fees that can eat into your gains.

Whenever you switch jobs, it’s important to carefully consider how to handle your 401k. The following two options are much better than leaving an old account behind. (For more insights that can help you navigate the financial implications of changing jobs, download our Job Change Financial Guide).

Option #1: Roll the Old 401k Into an IRA

One very effective strategy is to set up a traditional IRA or Roth IRA and roll all your old 401ks into it. By consolidating all the 401ks you’ve accumulated during your career into a single IRA, you’ll gain one account that can take you through your retirement and better visibility into your entire retirement portfolio.

Rolling an old 401k into an IRA also gives you more flexibility and control over how your retirement funds are invested. Most company-sponsored 401k plans offer very limited investment options. By comparison, an IRA can be invested in nearly any type of financial instrument. That means you and your financial planner can choose from a more diverse mix of retirement investment vehicles that best match your objectives, preferred asset allocation, risk tolerance, and investing timeline—rather than getting locked into a handful of options within a 401k plan.

Consolidating old 401ks into an IRA could also save you money in the long run. Almost all 401k plans charge administrative fees, but many traditional or Roth IRAs don’t. Or if they do, the fees are typically lower than those charged by a 401k plan administrator. Lower fees mean more of your hard-earned money stays invested, potentially fueling greater gains.

This strategy works best when you enlist the help of an experienced financial planner to guide you on choosing the best type of IRA (whether traditional or Roth) and the optimal investment options, based on your life goals. For instance, in some cases it’s advantageous to roll your old 401ks into a Roth IRA, so the funds can grow tax-free and the account won’t be subject to required minimum distributions (RMDs) that can end up bumping you into a higher tax bracket. Each individual’s goals and situation are different, so it’s best to consult with a financial planner on whether you should move your old 401k into a Roth IRA or traditional IRA and the optimal way to invest those funds, in the context of your entire retirement portfolio.  

Option #2: Roll the Old 401k Into the New Company’s 401k

Some companies will allow you to roll an old 401k into their 401k plan. While it might be easy to do logistically, and it will help consolidate your retirement accounts for better visibility into your whole portfolio, those are really the only advantages to this approach. When you move funds from one 401k to another, you’re still faced with the limited investment options and potentially high administrative fees of the new plan.

Before considering this option, ask the HR department at your new company to provide a copy of the plan’s disclosure agreement. This document will give you and your financial planner insight into how the company’s 401k plan has performed historically, along with their fee structure. If the plan’s performance has been mediocre and/or the administrative fees are high, you might opt for the flexibility and cost-effectiveness that an IRA offers. But if you do decide to roll the old 401k into the new company’s plan, consult with a planner to ensure you do the rollover in a way that avoids taxes and penalties.  

Recent or upcoming job change? Be sure to download our Job Change Financial Guide!