Previous post:

Next post:

My 401(k) Rollover Fun

by retirebyforty on October 22, 2012 · 36 comments

in investing

Get free update via email:
RB40 won't spam you

rollover my 401k to IRAThe 401(k) is of the best investment you can make with your income especially if your employer matches your investment. However, do you know what to do with your 401(k) once you leave a job? Here are the fun filled choices.

  • Leave it with your previous employer
  • Rollover to a Brokerage IRA
  • Rollover to new employer (not an option for me since I’m a stay at home dad/blogger now.)
  • Cash out (I don’t plan to withdraw until I’m over 60 so there is no sense cashing out now.)

Restrictions

Even before I retired from my corporate job, I planned to rollover my 401(k) to a brokerage so I can have total control of my investments. My previous employer’s 401(k) plan has certain restrictions which I’m not willing to live with now that I no longer work there.

My 401(k) plan is managed by Fidelity and there have been quite a number of changes over the past year. They trimmed the fund choices and made Fidelity BrokerageLink available for the employees. This whole move was very confusing to everyone and to make a long story short, my 401(k) was split into 3 parts. This is what my 401(k) looks like at the moment.

  • Fidelity NetBenefits (no trading fee so it’s easy to rebalance, but there are only about few choices) – FLPSX (mid cap) and VIIX (institution SP500 index)
  • Fidelity BrokerageLink (lots of choices, but I have to pay trading fee) – VB (small cap), VDE (energy), and VWO (emerging market)
  • Employer contribution plan – “Global Diversified” fund. I don’t have a choice of investment in this portion. The company figures their genius engineers are too dumb to make financial decisions.

The biggest problem here is the Global Diversified fund. The expense ratio is 0.9%. That’s $9 per $1000 of investment. That doesn’t sound like a lot, but if you have $100,000 invested, that’s $900 per year. It is not cheap. Another problem is that I don’t know what this fund is investing in.

Alternative Investments

35.36%

International Stock

23.08%

Global Bond Fund

20.32%

Large Cap US Stock Fund

18.92%

Small Cap US Stock Fund

2.32%

% of Total Portfolio

100.00%

What does this mean? There is no ticker symbol to track this investment because it is not a mutual fund. (I guess this is what a hedge fund looks like.) This is a big problem for me because it makes my asset allocation much more difficult. I have to find an equivalent fund and figure out my total asset allocation manually.

If I have a ticker symbol, I can just put it into my Personal Capital account and it will factor the investments into my asset allocation. BTW, I highly recommend Personal Capital to any self directed investors. It’s a great tool to have in your toolbox.

Rollover IRA

Now that I’m not working at this company anymore, I’m going to rollover the 401(k) to an IRA so I can have full control of this investment.

I’ll consolidate the IRA into 3-4 vanguard funds to keep it simple. This is my current target allocation.

  • 30% large cap
  • 10% mid cap
  • 10% small cap
  • 30% international
  • 20% bond

I’ll probably go with VTI (total stock market), VWO (emerging market), and VCLT (corporate bond) in my IRA. Then I’ll consolidate Mrs. RB40’s IRA into small cap and mid cap. I have an appointment with a financial planner/adviser from Personal Capital this week so maybe she’ll have some suggestions here.

Where to?

Originally, I wanted to rollover to Vanguard and do most of my retirement investing there. Did you know that Vanguard is owned by the funds themselves which means the investors own the company? This removes any conflict of interest and lets the company focus on keeping fees low and maximizing return to investors. However, E*TRADE currently has a $600 rollover bonus which is really tempting. I talked to a rep last week and I think I will go with E*TRADE for now. I’ll keep the IRA with them for a year and then see if it makes sense to move it after that.

I think leaving your 401(k) with your old employer is a bad idea. When you don’t work there anymore, you are out of the loop and you will be the last to know when there are changes to the plan. Most 401(k) plans have limited investment options and restrictions. Personally, I think it’s best to rollover to a brokerage IRA and invest in low fee Vanguard funds.

Have you had to go through this process recently? What did you do?

Get free update via email:
Stay in touch with Joe and see how he handles Retiring by 40 and being a stay at home dad.
We hate spam just as much as you

{ 36 comments… read them below or add one }

anon e. mouse October 22, 2012 at 5:12 am

I went through this process a couple years ago. I was moving from employer ‘A’ to employer ‘B’ (I have since returned to ‘A’), where ‘A’ is the same as your former employer.

I rolled my 401k and profit sharing accounts into Vanguard, for the same reasons you did. Fortunately employer ‘B’ already used Vanguard for their 401k/profit-sharing accounts, so rolling those over was quite easy when I returned to ‘A’.

One thing to keep in mind; if you are planning to ever to do an IRA -> Roth IRA conversion, but don’t want to do it with *all* your retirement, you might want to do that conversion before rolling your 401k into an IRA. Otherwise you’ll need to include your 401k assets in your rollover calculations, which may make things significantly more complex.

My advice: don’t succumb to one-time gimmicks from companies that want your money. E-trade may be a fine choice, but if you prefer Vanguard then don’t let $600 sway you. That’s chump change, and inertia means that once at E-trade, you’ll probably stay there, even though you really want Vanguard.

Reply

Jeremiah October 22, 2012 at 6:29 am

Mouse makes a great point about E-trade/Vanguard. If long-term, you are good with your money at E-trade; that money is gravy. Or, if Vanguard and E-trade are interchangeable to you, using the $600 as a deciding factor feels like a solid logic.

But, if you plan to move it to Vanguard in the future (and based on your posts, you feel like a big Vanguard fan), I would personally just move it there now.

Reply

retirebyforty October 22, 2012 at 6:54 am

Thanks for the input. I’m still undecided at the moment. $600 might be peanut in the grand scheme of things, but it’s a lot of money when I don’t have a paycheck anymore. :)
You are right about the inertia though.

Reply

SavvyFinancialLatina October 22, 2012 at 9:30 am

Do you have an option of moving part of your 401k to e trade (just enough to get the $600) and then another part to Vanguard?

Reply

retirebyforty October 22, 2012 at 10:43 pm

I don’t think so.

Reply

Mike October 22, 2012 at 5:51 am

Well…at least you’ve been researching and studying that market. I am starting to look at that some myself in the next couple years or so when it comes to my finances. I might have to check that Vanguard fund if possible.

Reply

Thomas S. Moore October 22, 2012 at 7:00 am

Do all companies allow you to keep it with them once you leave? I thought there was a deadline after you left a company though I could be wrong. I personally would roll over to the brokerage IRA. But I like having control of it and not many do. I think I just read something about Personal Capital on the College Investor. Looks like this maybe something to consider.

Reply

retirebyforty October 22, 2012 at 10:31 pm

I thought most companies will let you leave your 401k there. Personal Capital is pretty good. You should try it out.

Reply

Money Beagle October 22, 2012 at 7:06 am

I have always rolled mine over to the most current employer. I think this makes life a lot easier as you only have one plan and one set of funds to track. Otherwise, you have to watch each one. Trying to weed out high fee funds or those that might be underperforming is a lot easier if you only have one place to go look.

Reply

retirebyforty October 22, 2012 at 10:32 pm

That’s a good plan if your current employer has a good 401k plan. There seems to be a lot of restrictions on most 401k though.

Reply

Leigh October 22, 2012 at 7:52 am

If you’re planning on going with Vanguard funds, why not use the index funds? Since you spent so many years at your employer, I’m assuming you have a large enough balance to have Admiral shares ($10,000) in most of those funds if not all, which have the same expense ratios as the ETFs, but are easier to move money in and out of.

As for E-Trade versus Vanguard: sure, they have a $600 bonus for rolling over to E-Trade, but how much would you save per year using Admiral Shares over Investor Shares? (I’m pretty sure only Vanguard offers Admiral Shares, not any other brokerage firm.) Most of their funds shave about 0.10% off the expense ratio by going to Admiral Shares, which is $10 per $10,000 invested or $1 per $1,000 invested. So if you have $600,000 in your 401(k), Admiral Shares would be cheaper than E-Trade in one year. If you have $300,000, it would be cheaper in two years.

My 401(k) plan actually has a fee for keeping assets in the plan if you’re no longer working for the company, which would work out to about 0.07% extra per year for me. My 401(k) plan is pretty good as it has Vanguard index funds (Total International Stock Index, S&P 500 Index, Total Bond Index, and some others), but I would probably still roll it over when I leave. I could get Admiral shares in every fund in a Rollover IRA and then I have full control over the money, though it would mean no more backdoor Roth IRAs…

Reply

retirebyforty October 22, 2012 at 10:40 pm

I checked my Firstrade account and they let me buy Vanguard admiral shares. Since this will be a lump sum investment and I won’t be adding to it periodically, I’ll probably go with the ETFs.
Vanguard would be cheaper to rebalance since they don’t charge transaction fees.
Thanks for letting me know about the 401k plan fee. I’ll double check it.

Reply

Elizabeth @ Broke Professionals October 22, 2012 at 9:02 am

I did this two years ago, and I’m not happy with my decision. The brokerage fees are higher than I’d like to see, and I’ve learned so much since rolling over my account. Things may change with my husband’s job (and my own) in the next year, so I keep putting it off until then.

Reply

retirebyforty October 22, 2012 at 10:43 pm

You can just move the IRA to another broker right? I guess that’s the inertia.

Reply

SavvyFinancialLatina October 22, 2012 at 9:34 am

Your thoughts on rolling over my 401k have actually made me rethink my 401k fund options. When looking at expenses 1.6% seems like nothing right? But then when you do the math, it adds up to a lot of money.

Reply

retirebyforty October 22, 2012 at 10:44 pm

1.6% is pretty high. I avoid anything over 1% and prefer Vanguard funds for their low fees. I think most of my funds are around .5%.

Reply

SavvyFinancialLatina October 23, 2012 at 10:13 am

An un-experienced investor may not realize it, like me.

Have you considered doing a post on what constitutes a low expense on a fund?

Reply

retirebyforty October 24, 2012 at 10:02 am

OK, I’ll work on it. You can just go to Yahoo Finance and check the fee. It will show the expense ratio next to category average. If the fund is near category average, then you are paying too much. :) I think around half is ok.

Reply

JayCeezy October 22, 2012 at 10:17 am

This scenario has come up a couple of times for my wife and myself. Long story short, we consolidated into Vanguard funds, heavily concentrated in the Total Market Index and using the Prime Money Market as a bucket for temporary cash and IRA rollover receipts. Once you hold more than $100,000 at Vanguard, a nice feature is a certain number of brokerage transactions, and Bond and CD purchases with no commission.

We are of a certain age where we cannot withstand another bear market downturn as in 2003 (where the S&P went from 1,565 to 800) or 2007-09 (S&P from 1,530 to 666), so we have set up CD ladders for both after-tax and tax-advantaged accounts. Vanguard actually makes you acknowledge and jump through hoops if you consciously hold more than the FDIC-guaranteed amount of $250,000 at any one institution. It is quite easy to split up millions at different institutions to keep the FDIC protection; we do it all online. But the customer service is excellent, and on the few occasions we needed help ‘extracting’ our rollover monies from prior employer plans, the Vanguard people got results.

Bottom line, I like your thought to minimize expenses while keeping maximum control of your money. Continued success to you, Joe!

Reply

retirebyforty October 22, 2012 at 10:46 pm

Thanks for your input. I didn’t even think about the FDIC protection. The no commission structure sounds really nice. I will go see the details at Vanguard.

Reply

jim October 22, 2012 at 10:26 am

That Etrade $600 bonus is for if you rollover $250,000 or more. That works out to 0.2% for a year. $600 is nothing to sneeze at but you might be able to beat that 0.2% return via lower expense fees in Vanguard, especially over the long run.

Reply

retirebyforty October 22, 2012 at 10:47 pm

I was thinking about leaving it at Etrade for only a year and wouldn’t trade much. I’m still undecided and will figure it out in a week or so.

Reply

Fan October 22, 2012 at 11:16 am

I also quit my job, with no plans at this time for finding new work — and I was assuming that I should roll my 401k over to an IRA (if I do so, it would be Vanguard).

But then my accountant advised me that 401k plans are well-protected from claims by creditors, as opposed to your other assets, including IRAs. Obviously you should check this out for yourself and perform your own due diligence, but apparently, there are varying levels of creditor protection that are recognized for IRAs, which differ on a state-by-state basis.

Apparently, in California, IRAs are deemed to be reachable by creditors just like any of your other non-401k assets. So, I’ve decided to keep my 401k at my former employer, at least for now.

Of course, if you feel no need to shield your assets from potential liabilities, then this would not be an issue for you. If I lived in a state that protected IRAs as well as 401k plans, I would do the rollover for sure.

Reply

retirebyforty October 22, 2012 at 10:49 pm

I didn’t know that. I’ll do a bit more research on the claims protections. I don’t think we need a shield, but who know what can happen in the future.

Reply

krantcents October 22, 2012 at 1:09 pm

I went through a few years ago because Fidelity is no longer a provider. I just called and filled out the forms to convert it to an IRA. I like Vanguard too.

Reply

Fab October 22, 2012 at 6:16 pm

Thinking about rolling my 401K to Vanguard IRA… but wondering if it is a good timing now when the markets are soaring.

Reply

RichUncle EL October 23, 2012 at 8:28 am

I like the idea of rolling over to vanguard, and that is exactly what I would do. Every financially savvy person should have an IRA account besides their 401K account. So you can save in more than one place. If I ever leave a job I do a rollover immediately and put it in my IRA.

Reply

retirebyforty October 24, 2012 at 10:00 am

I think I’ll rollover to ETrade. It’s easier to go straight to Vanguard, but I think going to ETrade will give me more things to write about. :)

Reply

justin@thefrugalpath October 23, 2012 at 7:51 pm

Wow, I thought it would be simple to move your 401k from one broker to the next, they always say it is in the books. But all of these small factors can have a big impact on your money. Thanks for the advice.

Reply

retirebyforty October 24, 2012 at 10:03 am

I think I’ll go with ETrade so I’ll have more to write about (and grab the bonus.) :)

Reply

JoeTaxpayer October 28, 2012 at 11:31 am

The Mrs and I may soon be in this situation.
As she’s over 55, the option to take non-penalized withdrawals from the 401(k) is pretty attractive. And the fees, are minimal, .05% for their S&P index.

For me, with VOO (Vanguard’s S&P) I’d probably move it. The risk is that the market moves while the funds are in transit. So I have to think long and hard on this.

Not a choice I have to make immediately.

Reply

retirebyforty October 29, 2012 at 10:26 am

I’m afraid of the market movement too, but it has to be done. I’ll try to get the fund over as soon as I can to minimize the fluctuation.

Reply

cliff February 7, 2013 at 12:10 pm

i want to cash out my 401k from former employer but ING said they control how do I handle this

Reply

retirebyforty February 7, 2013 at 9:54 pm

If you want to cash out, you can just call them and tell them to send you a check. You’ll have to pay extra tax if you are not 59.5 yet though.

Reply

Kristel July 20, 2013 at 1:10 pm

Very interesting info. I am looking for advice on best choice for rolling over my part of ex-spouses 401k from previous employer. I know nothing about this so I have not taken my part out yet and it has made $3000 since the divorce. Not sure if I am able to get half of that as it only increased that amount because my part was still in there. Quadro states it has to be rolled into a retirement plan. Please advise as I am looking to keep it growing with maximum profit potential and lowest loss potential. Obviously.

Reply

retirebyforty July 22, 2013 at 8:43 am

I’m sorry. I have no idea how rolling over your spouse’s 401k work.
You should talk to a discount broker and see what they can do for you.
Try Firstrade, Scottrade, or Etrade. It shouldn’t be that hard to roll over.
Investment choice is harder. I would go with a Vanguard index fund like VTSMX or VFINX if you are new to investing.

Reply

Leave a Comment