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Why Having Too Many Retirement Accounts Can Ruin Your Retirement Plan



How many different investment accounts or retirement plans do you have? If it’s more than three, you could be seriously jeopardizing the long-term performance of your investments and undermining your retirement plan. Unless you have a specific strategy that centers on proactively managing multiple retirement accounts (more on that later), it’s very possible that a portion of what you might be gaining in returns may be lost due to inefficiencies and a lack of coordinated management of your investments. As with any aspect of financial planning, there is no black and white answer as to whether you should maintain multiple retirement accounts; but, you should at least be aware of the potential pitfalls in doing so.


Added Complexity

Perhaps the biggest reason for consolidating your retirement accounts it to simplify their management. Receiving and reviewing one account statement is much easier when it comes to tracking your investments and making decisions. Managing your financial life is difficult enough. Why add more complexity by making it harder to gain a complete view of your investments?


Sloppy Asset Allocation

Managing your investments to your asset allocation target is key to achieving desired long-term investment performance. Trying to implement an asset allocation strategy among multiple investment accounts can diminish its effectiveness and lead to over-diversification or under-diversification. Managing multiple accounts can be especially hard when rebalancing your portfolio to keep your asset allocation on track.

If one of your accounts is a 401(k) plan, you may be limited in your investment options, which could prevent you from achieving your asset allocation target. With an IRA, you have more investment options with the ability to achieve broader diversification among more varied asset classes. 


Overpaying Investment Fees

When it comes to long-term investment performance, fees matter. Paying just a half percent more than is necessary can reduce your portfolio value by tens of thousands of dollars over time. It is hard enough to track investment costs in one account; it can be especially hard to track them in multiple accounts. Also, if you are investing in mutual funds, you could be missing out on fee break points if the funds are spread out among several accounts.


When Multiple Accounts Might Make Sense

There are circumstances when having multiple retirement accounts could make sense if they are being managed to an overall strategy. For example, retirees might use multiple accounts as part of a bucket strategy – allocating portions of their assets to buckets designated for different applications in creating lifetime income sufficiency. The first bucket is designated for immediate cash flow needs and might be invested in cash and cash equivalents. The second bucket, to be used for cash flow needs four to six years out, could be invested in short-term fixed-income investments; and a third bucket is allocated for long-term asset growth. Each bucket has its own objective, time horizon and risk/return profile, making it easier to manage as part of an overall strategy.


Proceed With Caution When Consolidating Retirement Accounts

While most investors would be better off consolidating their retirement accounts, they need to exercise an abundance of caution when doing so. When rolling over a 401(k) account or IRA into an IRA, it could trigger contingent deferred sales charges when you sell certain mutual funds. It would be better to wait a couple of years to allow the sales charges to expire. You also want to be careful when rolling over a 401(k) account if you have any outstanding loans. If the loans are not repaid before you rollover your account, they will be reported as a taxable distribution. In addition, if you are under age 59 1/2, you could incur a 10% penalty. 

You will also need to consider whether you would be better off consolidating into a Roth IRA instead of a traditional IRA. This involves a conversion of your current 401(k) or IRA, which has current tax implications, but, depending on your situation, it could increase your after tax income in retirement.


Don’t Try to Go it Alone

Whether it is to simplify your financial life, reduce investment costs or enhance your ability to manage your asset allocation strategy, consolidating your retirement accounts is the best way to accomplish it. However, everyone’s situation has its unique circumstances requiring careful planning and execution. Before making any changes to your retirement accounts, it would be important to seek the objective guidance of a qualified, independent financial advisor.