Financial Planning 101 – Account Consolidation
In this series of articles, we will be introducing financial planning concepts for participants to consider, related both to personal finances and participation in a retirement plan. This first discussion is about account consolidation, a basic recommendation in many of our plans.
All of our planning engagements start with building and reviewing a balance sheet. This document looks at what you own (bank accounts, investments, retirement plans, real estate, personal property) and compares that with what you owe (mortgages, car loans, student loans, credit card balances). The difference between the two is called your net worth. It isn’t uncommon for younger people to have a negative net worth. As debts (including student loans) get paid down, your net worth will start to grow.
Looking at the asset section of the balance sheet (what you own), we identify all of the different accounts that people have open. Do you have multiple banking arrangements? There is an argument to be made for creating different buckets, especially if doing so helps you save for specific things. However, many banks will pay higher yields on larger balances. Even if that is not the case, limiting banking arrangements can help you manage your day-to-day finances more efficiently.
We also tend to see a lot of multiple retirement plans from previous employers. The administration and management of different retirement plan balances can be cumbersome, inefficient and costly. When evaluating what to consider when deciding whether to consolidate, we start with two important pieces of data: investment choices and fees. For both, the easiest way to review this data is with your annual fee disclosure statement from each employer’s plan. Generally speaking, this document (also called the ERISA 404(c) Participant Fee Disclosure) is found wherever you have access to plan notices and documentation. This document will detail any plan fees that you may be paying directly, as either a dollar amount or as a percentage of your account balance. In addition to plan fees, this document should list all of the available investments in the plan, along with performance information and associated costs. It is important to know what you may be paying for plan administration and each investment, so that you can compare with other account options for these balances.
Keep in mind that in some cases, keeping your retirement dollars in a qualified retirement plan (generally an employer-provided plan) offers more creditor protection at high balances. If your consolidated retirement balances are less than $1 million, then creditor protection should not be an issue when considering whether to consolidate.
Feel free to contact [email protected] for questions on account consolidation and a review of whether it makes sense for you.
Read the February 2023 Financial Focus:
- "The Big (Lifestyle) Creep" by Kristan Anderson, CEBS®, CFP® »
- "(Roth) Conversion Therapy" by Kristan Anderson, CEBS®, CFP® »
- "Charitable Gifting with IRAs" by Victoria Henry, CFP® »
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