Financial Planning 101 – Account Consolidation

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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 kanderson@westfinancial.com for questions on account consolidation and a review of whether it makes sense for you.

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Disclosure

West Financial Services, Inc. (“WFS”) offers investment advisory services and is registered with the U.S. Securities and Exchange Commission (“SEC”). SEC registration does not constitute an endorsement of the firm by the SEC nor does it indicate that the firm has attained a particular level of skill or ability. You should carefully read and review all information provided by WFS, including Form ADV Part 1A, Part 2A brochure and all supplements, and Form CRS.

This information is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own.  You should not treat these materials as advice in relation to legal, taxation, or investment matters. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisers.

Certain information contained herein was derived from third party sources as indicated. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. We have not and will not independently verify this information. Where such sources include opinions and projections, such opinions and projections should be ascribed only to the applicable third party source and not to WFS.