Wednesday, February 28, 2007

6 Reasons to Roll-Over Your 401(k)

After leaving their job for a new one, many people leave their old 401(k) with their former employer. They do so for a variety of reasons: they forget to move it; they are too lazy; they think their old 401(k) is a good deal etc. However, I am of the opinion that once you leave your employer, your retirement savings should leave as well.

Here are 5 reasons why you should make the effort:

1. Your 401(k) May Be a Bad Deal - it is truly amazing how many bad 401(k) plans are out there. I intend to cover the topic in a future article using what I learned as a member of my company's 401(k) plan management team. Some plans impose attrocious expense rates, wrap charges and other needless costs. Why bear these costs if you don't have to?

2. Expand Your Investment Options - most 401(k), even the good ones, restrict their participants to a few investment options. In many companies those investment options are selected by the HR team... a team qualified for this task mainly by... nothing. Worse yet, in some companies the investment options are chosen by a broker, who may or may not be giving your company impartial advice. Roll your money out and make your own plans.

3. Consolidate Your Accounts - how annoying is it to get 17 different statements from several different financial institutions? By consolidating your old 401(k) plans into a single IRA you can manage your portfolio in a single account and get complete picture of your investments all in one place. Even more importantly, by rolling out several accounts into one you can sometimes save on expenses. For example, The Vanguard Group offers substantially lower expense ratios for accounts that pass a certain size threshold (these are even lower than their already low fees).

4. Avoid the Money Market Trap - in some cases, if your former employer is unable to make contact with you and your previous investment choices in your 401(k) are no longer available, your investments may be placed in some sort of stable principal fund, i.e. the place where money goes to die. If you forget to follow up, it may be years before you realize that your hard earned retirement investment is earning 2% a year. Seriously, just take your money and run.

5. Tracking Your Money - the funds in my company's current 401(k) plan, like those in many similar plans, do not use ticker symbols and are not easily trackable. In many cases this is true for companies whose 401(k) plans are managed by an insurance company (ING, Hartford etc.) By rolling-over your 401(k) into an IRA you will be able to invest your money in funds for which a public price is posted on a daily basis. You know, like one of those things that people actually want to invest in...

6. Index Investing - it is amazing that after all this time, most 401(k) plans offer only minimal index fund investment options. My own company's 401(k) plan offers none. I am stuck with a choice of only actively managed funds. Even those plans that offer some indexing options don't offer enough of them. For example, when speaking with Fidelity on behalf of my company last week, I was told that their 401(k) platform does not include any international indexing options. As many of you know, a majority of actively managed funds underperform their stock market benchmarks. Yes, that's what we like: paying more for less performance... Why would you want to be stuck with that?

Convinced yet? Well if you're not, stay tuned. I will be writing a lot more about the problems with 401(k) plans and how an ordinary employee can drive a change in his company's retirement plan.

1 comment:

Derek Pilecki said...

Another reason to rollover a 401k is to improve investment decision making. It is easier to diversify and track one account of $50,000, rather than, following 5 accounts of $10,000 at different former employers. With many accounts, you may try to diversify each one and become over diversified.

Also, if you have one consolidated account, you may take it more seriously. If you decide to make a change in investment strategy, you're more likely to act on it because you have a meaningful amount of money.

In addition to reducing paperwork and account statements, you are less likely to lose the login and password to one larger account than you are to 5 smaller accounts.