How does it benefit an employee?

 

A 401k-rollover is quite complex in comparison to an IRA rollover. The complexity derives from the nature of ownership of funds in a 401k plan. In a 401k plan, the employee assets are held in the form of a trust and this introduces a number of legal complications while initiating a rollover process. Despite the intricacies involved in a 401k-rollover process, quite a few 401k-account holders undertake this activity due to the various advantages offered by it. A 401k-rollover helps the account holder in achieving savings both in terms of costs as well as the time by consolidating the different 401k accounts into a single 401k or a similar IRA account. The 401k-rollover provides a way to consolidate multiple 401k accounts opened with the former employers. The major benefits of this consolidation process to the account owner include:

 

Ease of management – In case an employee has switched a number of jobs during his career; he may end up having a 401k account with each of his employers. This may lead to a situation where the retirement funds of an employee are scattered across multiple 401k accounts that are invested into different financial asset classes thereby further complicating the process of tracking and comparing their individual returns. The efforts required in keeping a check on the multiple 401k accounts make the task complicated. The employee may be inundated with a deluge of financial statements coming from separate 401k accounts. This kind of a situation is best avoided by consolidating the different 401k accounts into a single 401k or an IRA. This also simplifies the process of managing the retirement funds.

 

Cost savings – All the 401k and IRA plans do not have high internal expenses but quite a few do charge the account owners heavily in the form of various commissions and fees. At the time of rollover, an employee can exercise the option of going for the asset class in which he is interested in investing. He can move from a low return yielding asset class to a high return yielding asset class. The account owner may even choose to invest in low cost products such as index and exchange traded funds. These funds charge very little in terms of fees to the customers and can lead to substantial cost savings to the account owner. The impact of high operating fees on the portfolio returns is often overlooked by the investors and leads to disappointment. The investors may have regrets about the management of their portfolio. Moreover, the fees and expenses are the only aspects of an investment account that can be controlled by the investor himself.

Apart from the above two benefits, a rollover can make an account owner feel in control of his savings by deciding the asset class in which it is invested. It allows the investor to switch from one plan to another and thereby exercising his right to choose a particular investment plan that can meet his objective and which offers a suitable risk-return profile to the investor.