Why Keeping Your 401(k) After Retiring Could Be a Smart Savings Decision

New retirees face a lot of big decisions that can help or hinder their financial security: Should they downsize? When’s the best time to claim Social Security? And where should they store their retirement savings now that they're finally ready to use them?

Determining where to keep retirement savings is one of the most consequential choices retirees make when they exit the workforce. Those who participate in an employer-sponsored plan like a 401(k) can generally keep their savings in that plan, roll them over into an Individual Retirement Account (IRA) or cash out the whole sum (and pay taxes on it).

A September study by economists Olivia S. Mitchell, Catherine Reilly and John Turner found that while IRAs can offer certain advantages, most retirees are better off retaining their savings in their employer-sponsored accounts. That’s especially the case for retirees with limited assets and lower levels of financial literacy, according to the researchers.

Changes to the law, they say, may provide even more incentive for retirees to remain in employer plans in coming years.

401(k) vs. rollover IRA

Nowadays, most retirement nest eggs are accumulated through employer-sponsored defined contribution plans like 401(k)s — roughly 67% of American workers have access to them, according to the U.S. Bureau of Labor Statistics.

But once you actually retire, figuring out where to house savings those becomes a critical — and frequently complicated — financial decision, according to Mitchell, a professor at the Wharton School of the University of Pennsylvania. Retirees must not only navigate the tax implications of their options but also determine which path is going to yield the best returns with the least risk.

This is especially important because retirees have to make sure those assets last them through retirement — a growing challenge amid a rising cost of living and expanding life expectancies.

Many people opt to roll their 401(k) funds into an IRA, which is a different type of tax-advantaged retirement account, when they retire.

In addition to their tax benefits, IRAs tend to offer more customized advice, investment choices and distribution options than workplace plans. As a result, IRA account holders typically enjoy more control over their investments and greater withdrawal flexibility. This route is relatively popular: A 2021 study by Pew Charitable Trusts found that about 46% of recent retirees transferred their savings to IRAs.

Why to keep savings in an employer retirement plan

But there are some major benefits to remaining in a workplace plan, namely the fact that employers continue to bear fiduciary responsibility for those funds even when workers retire, Mitchell says. This provides a layer of investor protection because the fiduciary is required by law to act in participants’ best interest when choosing and managing investments.

Savings in a defined contribution plan are also protected from creditors if a person files for bankruptcy, unlike with an IRA, Mitchell says.

Both IRAs and employer-sponsored retirement plans come with advisory, investment management and administrative fees — but with large company plans, these costs are usually lower than with a typical IRA. Employers are often able to negotiate better fees and personalized investment products products for older participants because they have institutional leverage, Mitchell adds. (Specifically, they they can provide options to buy annuities with 401(k) savings, giving retirees an opportunity to turn their assets in a guaranteed lifetime income stream and protection from outliving their savings.)

Staying in a well-managed employer plan can be especially advantageous for retirees with less savings and less financial experience — that’s most older Americans, according to research — because they don’t have to choose or manage their investments.

Early retirement is another factor to consider when planning where to keep your assets in retirement. With both IRAs and defined contribution plans, you have to be a minimum 59 1/2 years old to start taking withdrawals without penalty. But thanks to an IRS rule, if a worker is at least 55 and leaves or loses their job for any reason, they can start making withdrawals from their 401(k) or 403(b) without paying the 10% penalty.

Still, there are cases where it makes sense to roll savings into an IRA. Smaller employer plans tend to come with higher fees, so in this instance, an IRA is more cost efficient for retirees. Mitchell says IRAs can also be more beneficial if a retiree wants to consolidate a few different plans from different employers.

And for those who want to purchase an annuity and don't have the option to do so under their employer plan, an IRA usually makes it easy to convert savings into a lifetime income stream.

Changes to workplace retirement plans under SECURE Acts

Though most employer plans don't currently offer annuities, Mitchell says new provisions of the legislative packages known as SECURE 1.0 and 2.0 have incentivized employers to provide lifetime benefit payments. The sweeping set of retirement plan provisions are intended to help Americans grow their retirement savings in a landscape where most workers no longer have defined-benefit options, or pensions.

"There has been a series of legislative steps to encourage 'putting the pension back' into defined contribution plans in the US over the past few years," she says.

The SECURE 1.0 Act of 2019 allowed employers to add annuity options to their plans. Under 2022's SECURE 2.0, plan participants are now able to to purchase deferred annuities, which will eventually provide the owner a regular payment at an established future date, for up to $200,000 using their account assets, according to Mitchell.

This allows workers to defer more of their retirement income from taxes, she adds. These regulations — in addition to a host of existing perks — have made it more attractive overall for retirees to keep their savings in their employer plans.

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