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Don’t Rollover Your 401K

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.