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Don’t Rollover Your 401K

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This is a Devil's Advocate post.

This is a psuedo-Devil’s Advocate because it’s not generally assumed that one should always roll over their 401k’s when they leave their job but a lot of folks have recently been asking me, since I had just gone through the process, who they should roll their 401k over to (I wish with Vanguard). The troubling aspect of that question is that they’ve already decided to rollover their 401k before they’ve answered the crucial questions leading up to that decision. See, you should rollover your 401k if it makes sense – that is if you can get better options, better pricing, and better management elsewhere. By asking “where” to go after “if” you should go, you can’t analyze the differences. There are many reasons why you should stick with your 401k administrator even after you leave your job, here they are:

Employer institutional funds may be superior

Depending on how big your company is, you may be dealing with your company’s own special institutional funds that aren’t available on the open market and they could be awesome (or awesome in certain aspects). This was the case at my former employer who had about a dozen actively managed funds (they weren’t index funds) with fees under the average expense ratios of typical actively managed funds and performance on par with its benchmarks – so you get actively managed while paying near index fund prices. Now, if you don’t have many good options with your current administrator, the fact that they’re cheap doesn’t help (but cheap is better than expensive).

Custodial fees and balance requirements

Your 401K funds probably don’t have any balance requirements and reasonable custodial fees, that’s usually not the case with major brokerages. Vanguard doesn’t have low balance fees for retirement accounts but it does have initial minimum investments (usually $3,000 to $5,000) and Fidelity does have low balance fees though it’s phrased as they “may” charge a $12 fee for a balance under $2,000, so be sure to check whether the brokerage you choose has this low balance fee. The same applies for custodial fees, be sure to double check those before you roll over.

You can roll it over whenever you want

You are thinking about rolling over your 401k because you just left your job (otherwise you wouldn’t have this opportunity in the first place) and that usually comes with a whole host of other issues you have to deal with. You may have been fired or you left of your own free will but either way, don’t feel like you need to worry about whether you should roll your 401k within a certain short time frame. Some plans give you three or five years (check with your administrator) to roll it over, don’t think you have to do it in the next month. I waited six months before I rolled mine over and I could’ve waited even longer if I wanted to.

Rolling over your 401k, especially if its because you just lost your job, can be a very complicated and somewhat confusing time, don’t feel that you should, 100% of the time, always roll it over to an IRA. Most of the time, you will probably want to roll it over to open up your options, but don’t feel it’s a forgone conclusion. Also, remember that you have plenty of time to weight your options, perhaps after things have settled down, so don’t make any rash and hasty decisions.

{ 24 comments, please add your thoughts now! }

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24 Responses to “Don’t Rollover Your 401K”

  1. William says:

    Dumbest advice yet. Rollover always a better choice because the limitless choices in an IRA are ALWAYS better than the limited choices in your 401k. Additionally, in most cases you cannot just rollover your 401k “whenever you want” because companies don’t want to pay annual fees for plan participants no longer employed with them. Most companies allow a one year limit within which to roll after termination of service. Do your homework, stupid.

  2. Jeremy says:

    This is a good topic. Conventional wisdom does tell us to move the money and take control in our own low-cost accounts, but some of the points you brought up are very true.

    The big thing you mentioned is the potentially good expense ratios you can find with institutional funds in many plans. The plan I’m in we have quite a selection of funds and many of the expense ratios are on part with those of the likes of vanguard. We even have an index fund that has an expense ratio of only about a tenth of a percentage point more than the same vanguard index fund, yet the fund in our plan has actually done just as good or just slightly better (by less than a 10th of a %) even after expenses. And there are also many other actively managed funds you can get at or near no-load prices.

    Of course this generally applies to some of the larger plans with good providers. Many smaller companies can have plans that will just rape you on fees and that is a no-brainer.

    But I agree, a lot of people are real quick to pull the trigger when changing jobs to not really evaluate the consequences of the situation. I still think that 9 times out of 10 rolling over the funds will be the way to go, but there are times where it may not make sense to, or at least give it some time before actually making the move.

  3. mapgirl says:

    Well I have to say, I kind of regret rolling over my old 401k to a private IRA with the same company because they hit me up with custodial fees for two funds where I have low balances. Had I kept them in the 401k plan, I wouldn’t have eroded all my gains with the custodial fees. (But since one of the funds is now closed, I don’t want to close that fund quite yet. I’ll just have to add more to it till it reaches minimum.)

    I decided to rollover into an IRA instead of into the current 401k I have because I hate the current 401k administrator. My old 401k was at a much better firm. But it would have been cool if it was all at one company and I could keep one account instead of two.

  4. Jeremy says:

    One thing I also forgot to mention is that even though people like us can clearly see the benefits of moving these funds to an IRA and investing in no-load and very low cost funds there are many, many people out there who are clueless about these investment alternatives.

    Someone who doesn’t do much investing on their own will likely end up letting it be known to someone that they have changed jobs and one of the first people to notice this is your bank. I used to work for a bank so I am well aware of how sneaky they can be.

    Anyway, what will happen is the bank or some other financial firm will give them a slick presentation as to why to roll their 401k into an IRA with them and Mr. Average Joe investor will wind up probably buying mutual funds with a 4-5% front load and expense ratios over 1%.

    This happens all the time and for people like this who don’t have the knowledge or desire to learn about low-cost options they will wind up getting sucked into these expensive investments unknowingly costing them much more than leaving it with their employer.

    I think that is an important distinction to make. If you are wise enough to know there are low-cost options and to invest that money on your own, yes rolling the money out is probably going to be your best bet. But for those individuals who are either apathetic to their investment options or simply don’t understand the real options available they are likely to move into investments that are assisted by a broker or banker that will cost them far more than if they had left it alone.

  5. dong says:

    I think if you can it’s actually better to rollover into a current 401k. From an organizational perspective it’s easier and I think makes alot of sense especially if you’re rolling over a small amount. Of course this assumes that your current 401k plan is OK. Also because of the way Roth IRA’s rollover’s work, there’s a good chance you do may not want money sitting in a tax deductible rollover account if at later date you want to rollover a non-deducitle IRA.

  6. Mike says:

    This was an extremely rude reply by someone who has no concept of the vein of these posts, nor did he fully read this post. Keep up the good work, Jim, and I look forward to more of these posts. They help the reader look at the flip side of conventional wisdom in order to help reinforce or debunk what is taken as “rule”, in order to help make the best decision for one’s individual situation, for which no 2 are alike.

  7. Chris says:

    I like Devil’s Advocate posts! Anyway, I do think that an IRA is a preferable rollover destination for a 401(k). I feel no need to put old 401(k) money at a new job. I would rather have the money in an IRA so I can buy stocks.

  8. thc says:

    This is a great post because it points out that there are no simple answers to financial planning questions. Every situation is different and there are no pat answers. The disagreement among previous responses from people who think they know something is proof that things are not as simple as they sometimes seem. Seek professional advice.

  9. Wanda says:

    I think there are also legal benefits to keeping your money in an 401(k). I think that 401(k) money is protected from litigation, whereas IRA money is not. That would be something of concern for people such as surgeons, etc.

    But as always, check with your lawyer if that’s something you’re worried about.

  10. EA says:

    I’ve done both…I have a rollover IRA from a company that was purchased (and the 401k dissolved, so I had little choice) and a 401k from another company that I’m keeping because the fees were non-existant. I recently moved the rollover IRA to Vanguard, and may roll the 401k there as well.

    Up until now the company has been covering some of the fees, making it a good place to keep my money, but they are changing fund companies and the rumor is that there will be fees of at least 1% for the managed funds. If that’s true, I’m moving to Vanguard. It would give me more money in one place to allow me to diversify without the low balance fees, and would be easier to have everything in one place.

  11. Steve Austin says:

    Forget the professionals; no one cares more about your money than you do, and professionals have a vested interest in convincing you that things are not as simple as they sometimes seem. Research the factors and do it yourself. Money management isn’t law or medicine.

  12. Dianne P. says:

    I really appreciate this information. My 401K is with a huge company. It’s practically doubled since I left the Company four years ago. (from $100,000 to 200,000) I’m being bombarded by banks, Brokers and so forth telling me I should roll it to an IRA. What bothers me is the Fees. 5% off the top for Sales seems excessive. Then there’s the regular fees. My 401K fees for the past year have been less than $60! I’m not comfortable making a move like this at this time. It doesn’t make sense. Thanks.

  13. Scott Brooks says:

    Dianne,

    There are several financial advisors which work on a hourly or fee-basis.
    Have you researched the fees your mutual funds charge inside the 401k plan?
    $60 on $200K seems very unlikely. I would bet you are paying well over $1000 per year.

    I would search out an advisor who does more than sell commission based funds.

    Steve,

    You are right money management is not medicine. I am sure you would not perform surgery on yourself. Most people fail investing their own money because investors love to chase top performing investments. If I had a $5 bill for every Fidelity IRA I have seen that was destroyed by the tech bubble I would be a very rich man.

  14. Anonymous says:

    MY HUSBAND DIED 2 YEARS AGO .. HE HAS A 401K FROM HIS COMPANY THAT I PUT IN MY NAME… I AM ONLY 55 YEARS OLD AND I KNOW THAT I CAN’T USE ANY OF IT .. I WOULD LIKE TO KEEP IT SOMEWHERE THAT I WOULD NOT EVER LOOSE ON .. THAT I WOULD HAVE THIS WHEN I RETIRE
    WHAT SHOULD I DO

  15. Danny says:

    Good advice. I have 4 different 401(k) accounts that I have left at previous employers. They’re all doing great. Another point – If you roll over your 401(k) into a subsequent employer’s plan, you retain the ability of borrowing against these funds. Now many will argue that it’s never good to borrow against your 401(k), but at least you have the option. Roll it into an IRA, and you lose that option. Also, if you want to retire at 55, you can begin making withdrawals from a 401(k) without the 10% penalty. Roll it over into an IRA and you have to wait until you are 59 1/2 to withdraw the money penalty-free.

  16. Randel says:

    It’s that ok if I pull out or close my account on my 401K?

  17. Anonymous says:

    I work with 401k’s. I would say 90%> makes sense to rollover 401k to an IRA. The “active” managed investment choices the article describes try to get a prospectus on these funds, they are not required to disclose to the SEC what they are investing in. Lets put it this way I like to know where my money is being invested. Only few reasons a 401k makes sense:

    1. Looking for loan and you are not 59 1/2 years old.

    2. Age 55 rules

    3. GICs(guaranteed investment contracts).
    -tend to yield high rate then money market.
    -taking a little more risk then money market.

    If these reasons is not what you looking for probably would make sense to rollover.

  18. rosette says:

    the problem with not rolling the money over is that if your former employer changes places where your funds currently are…..

    I am currently having a minimum issue with some of my former employer 401k which is why I haven’t rolled it out into a traditional IRA…

  19. Michael says:

    I almost rolled over my 401k to IRA, when I read in AARP magazine (March or April 2010) advice not to. And they were right. When I compared fees, IRA was twice more expensive. Stay where you are in 401k and don’t feed financial advisers either.

  20. Mathew says:

    I am 24 years old working part time at a state college. My situation is that I have been contributing to my Roth IRA for 7 years. My employeer at the college matches 100% of a 9.2 percent 401K contribution which I have been doing in addition to my 401K for my year and a half of employment. My question is since I am currently a state employee at the college would it be wise to rollover my 401K if I ever quit this job?

  21. Mark says:

    If I rollover my 401k, I will get charged a $50 fee according to the fine print that they require me to sign on my distribution election form. So to William who posted earlier, I disagree. It is not always better to rollover. Most people are not aware of these fees and this information needs to get out. I did my homework. This is an excellent topic.

  22. Peter says:

    Negating minimal balances, my personal experience has found that if your company has hired a management company like ING or Hewett, it’s more than likely you can save money and earn a greater return by investing in a no load fund. Someone suggested in rolling it over into an ETF and that seems like it would reduce the costs further.

  23. Peter says:

    In 60% of the 401K plans, the management fees and expenses are worth rolling over into non-load financial houses even if you have less than $3000 – $5,000. This is because the non-load financial houses typically will charge fees/expenses that are less than 401K management fees and fund expenses. That said, virtually all companies that use management companies like ING/Hewitt will charge you management fees that no-load investment houses won’t. No-load investment houses also have, generally, lower fees and a greater selection of funds to choose from. A place where many roll over their funds to are index funds such as the Wilshire 5000. Over time, it outperforms virtually all actively managed funds and it’s expenses to run is very low. I recently rolled over one company sponsored 401K plan that had management fees and expenses that were over 13X that of the Wilshire 5000 and was deliver less than 50% of the returns. Another benefits of rolling over your 401K, despite the greater selection of funds to choose from are is consolidate of paperwork. Why a company hires a management company to make the paperwork that the financial fund houses can do on their own and then charge the employee for has always been strange to me. If I had it my way, if a large company decided to go that route, it would not be legally allowed to charge the employees, but have to pay for it on it’s own. That a lone would give companies incentives to keep expenses down and do it in house.


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