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Four Good Reasons You Should Rollover Your 401(k)

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401k balanceWhen I was in my mid-twenties, I switched jobs moving from one defense contractor to another. My former employer, Northrop Grumman, offered a dozen or so investment options in the 401(k) and, all things considered, it was a pretty good plan. The fees were a little high but not so much so that you felt ripped off and the options were fair – not too many funds and not too few.

That said, I stilled rolled them over to a Rollover IRA at a brokerage firm and I’ll explain you why.

You Can Only Control Fees

My former employer was large enough that they could have their own funds, rather than simply lean on the administrator and mark up a bunch of outside funds. That said, it still doesn’t compare to any major brokerage firm. Fidelity and Vanguard funds are so enormous that the fees have to be low.

Vanguard 500 Index Fund Investor Shares (VFINX) have an expense ratio of 0.17% (Admiral Shares are just 0.05%) and the fund total net assets is $118.5 billion. The fees are so low because 1) it’s Vanguard and they’re frugal; 2) it’s $118.5 billion in assets (the share class total net assets is $24.8 billion, which is still enormous). Very few funds can compete with that.

Plus, and this is huge especially when you’re young, there are no annual administrative fees if you opt for electronic statements. $50 doesn’t seem like a lot but when you’re putting a few thousand away each year, losing a percent to a fee is brutal. You’d rather than money go to your retirement.

Consolidation

I like having many of my investment accounts in one place. I log in to one account with one brokerage and I can see the vast majority of my investments in one place. It just makes management so much easier. I make sure I’m invested in bonds in my tax deferred accounts, more equities in my taxable, and everything is visible in a straightforward manner. It took quite some time to move everything into place but now that most of it is done, I’m more organized and better for it.

Consolidation also offers another benefit – higher classes of personal service because of balance. If you have between $50,000 and half a million in assets, you qualify for Voyager services. If you have between half a million and a million, you qualify for Voyager Select. Break a million and you get Flagship services. It’s no secret that wherever you go, you get more if you have more. The easiest, and sometimes only, way to get there is to pool your resources.

Options, Options, Options

It’s always good to have fund options and a company 401(k), even administered through a large brokerage, will still not be as diverse as getting a regular account at a large brokerage. While you really don’t need more than a few options, it’s nice to pick those options yourself rather than be at the whim of someone in human resources.

Staying Updated

When you leave a company, it’s hard to remain updated on the changes they make to your 401(k). This is especially difficult if you stick with your old 401(k) and open a new one or switch multiple jobs, it’s just a pain to manage everything and make sure you are updated on the changes to the plan. By rolling over to your current job or to a brokerage, it’s much easier to stay in the loop. You won’t discover a big change years later simply because they were emailing an old email account.

These are just four reasons, albeit the four that convinced me to always rollover (again, my former employer 401k plans were never bad – they were affordable with good options) my 401k.

Do you have a good reason to rollover your 401(k) that I missed?

(Photo Credit: Mr. T in DC)

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9 Responses to “Four Good Reasons You Should Rollover Your 401(k)”

  1. Definitely roll it over to avoid fees. When I worked at a CPA firm we had to audit a 401(k) for a company that went bankrupt. It was required by ERISA but there was no company to pay our fees so they actually took the fees from the participants’ accounts. Same thing with the lawyer’s fees. I would have been pissed if I accidently left my money in that 401(k).

  2. elmo says:

    I have heard of one reason not to rollover a 401(k) but haven’t really checked it out. In some states if you are sued, the assests in your retirement plans can’t be taken from you (I think FL is one of those states which is how OJ kept his retirement money in the wrongful death suit he lost). In some states IRA’s are not protected, but 401(k)’s are.

  3. Bryan says:

    I rolled mine to avoid higher fees, and like you said to consolidate where they are located. I rolled them to the same company I use for my Roth IRAs.

  4. Anthony says:

    Why are you splitting bonds into tax deferred accounts and equities into taxable accounts?

  5. Raghu says:

    Mistakenly, I have converted my 401K from my first job to an IRA. It is deposited in a savings account at a local credit union.
    I am prepared to play some risky games with this fund, there is no return on a savings account. Is there a way I can buy stocks/bonds with this fund? Don’t really know how I can do this. Do not want to go to a broker. Any help/guidance would be greatly appreciated.

  6. admiral58 says:

    The BEST reason to NOT roll over your Traditional 401k:

    If you make too much money to make a deductible IRA contribution, you can open up a Traditional IRA, contribute, and then immediately convert it to a Roth IRA.

    But if you have any deductible ira money, in any of your ira accounts, then you must include those amounts and will be paying taxes.

  7. Mitchell Fox says:

    Right on @admiral58 – I was going to say exactly the same thing.

    If you have a Rollover IRA, you cannot play the popular game of moving money directly from a non-deductible IRA into a Roth IRA through a conversion without paying steep penalties. For higher earners, it may be better to simply move your old 401k into your current 401k plan if you like it.

  8. aua868s says:

    In simple words, Bond funds incur more tax. So they should go into Tax Deferred accounts (IRA, ROTH IRA, 401K, etc) because Tax Deferred Accounts are not taxable. Equity funds can go into both Taxable and Tax Deferred Accounts. (they incur less tax).

    The following link should explain more about it.
    http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

    Good Luck!

    • Jim says:

      So here’s an alternative take on the whole bond in a deferred account discussion, if your bonds are viewed as safe investments and you may need to tap into them (they’re basically slightly riskier savings accounts), then putting them in tax deferred accounts makes them harder to get to. By keeping it in a taxable account, you can get access to the funds without paying a penalty.


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