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Boy, am I glad I rolled over my 401k!

by retirebyforty on February 13, 2013 · 21 comments

in investing, retirement

After I left my job last year, I had to decide whether to roll over my 401(k) or just keep it at my old employer. There are some advantages to leaving the money at your old 401(k), chiefly federal law protects the money in 401(k) plans from most lawsuits. It’s too bad IRAs do not enjoy the same protection.

However, my old 401(k) plan had one big restriction. Specifically, the employer contribution portion of the plan had to be invested in a private “Global Diversified” fund. Since I wanted to gain full control of my retirement investment, I decided to rollover to E*Trade where I could invest in anything I wanted.

How did I do since November?

I rolled over my 401(k) and went with the equal sector weighting strategy. The main idea behind this strategy is that the SP500 index is overweight in volatile sectors – Technology and Finance. The SP500 index is also underweight in more stable sectors like utilities and consumer staples. The equal sector weighting strategy will have lower volatility than just investing in the SP500 index fund.

The private “Global Diversified” fund went up 4.4% since I rolled over my 401(k). In comparison, my IRA increased 8.3% since then. That is a huge difference and it was worth the trouble of rolling over to an IRA. Of course, everyone is an investing genius when the market is going gangbusters like it did over the last few months. The true test will come when we have a big down market. I plan to be done with bond allocation by that time. If it all goes according to plan, the bond allocation and equal sector weighting strategy will result in less losses than the index during a down turn.

Current Asset Allocation

401k roll over

Here is a look at the current asset allocation in my IRA. I ran the account through Morningstar Instant
X-Ray to see how it is doing. Overall, it looks ok and all the sectors are somewhat equally weighted. One aberration here is the Utilities. I allocated 15% for bonds, but I don’t think it’s the right time to buy bonds yet so I stashed that money in utilities for now. I will move it to bonds later.

Fee

Another big advantage to rolling over the 401(k) is the ability to control costs. I was paying over $1,000 per year in fees when my investment was in the old 401(k) plan. Now that I’m with E*Trade, I minimize costs by investing with Vanguard ETFs. In fact, Vanguard just reduced the expenses on 10 industry sector ETFs earlier this year (among other funds.) As a result, I’m paying only about 0.16% in fees. The “Global Diversified” fund has an expense ratio of 1.03%. That’s quite a bit more taken off the top every year. This can be especially painful in a down year because they’ll take 1.03% of your money when your investment is already losing money.

Keep an eye on your 401(k)

Every 401(k) plan is different and it’s up to you to figure out if you should roll it over to an IRA or not. If your 401(k) plan is restrictive and doesn’t have enough good choices, then perhaps rolling it over is the way to go.

If you need help keeping track of your finances, try using Personal Capital to manage your budget and net worth. It can help you keep track of your income, expenses, and net worth, all in one place. Personal Capital is geared for investors and has many great tools. See my review of Personal Capital and how they helped me reduce what I’m paying in investment fees.

{ 21 comments… read them below or add one }

My Financial Independence Journey February 13, 2013 at 2:47 am

Sounds like rolling over your 401k was a good idea.

What consistently amazes me is how bad so many 401k programs are. No match here, super high fees there, and nonsensical restrictions in your case. If you want tax deferred savings, then IRAs are so much better choices.

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writing2reality February 13, 2013 at 7:56 am

It is amazing to me in talking with peers and other people, how little people understand their own 401(k), or even the entirity of their company’s benefit programs. Like you said, no match, high fees, etc.

But even more amazing are the people who ingore and miss out on the benefits, such as a match, ESPP, etc. No amount of fees will eliminate the gain on a matching program or ESPP program.

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My Financial Independence Journey February 13, 2013 at 11:45 am

Having recently sat through a benefits orientation, I can tell you that most of these programs are not well explained. My 401k training was combined with health insurance (way more important at least in the short term) and about 1,000 worthless other benefits (e.g. group legal).

Too much info and too much jargon for most people to process in one sitting.

And then, to make things even worse, we have this example from a former employer of mine. I set up all my 401k options ASAP as soon as I got the info. Then 3 months later they all got changed without my permission. Apparently, I didn’t read the fine print in one of the numerous, mostly spammy, letters they sent. So I had to go and set everything back. I hate 401ks only slightly less than I hate social security.

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retirebyforty February 13, 2013 at 11:22 pm

I agree. Last year we had a big change in the 401k plan and it took a long time to get any information.

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retirebyforty February 13, 2013 at 11:19 pm

At least more companies now are signing employees up for a 401k plan by default. The company match and ESPP are a great side benefit. I miss those. :(

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retirebyforty February 13, 2013 at 11:09 pm

The company figures their employees don’t know how to invest. I guess that’s true for many people, but it’s unbearable for self directed investors.

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Mike February 13, 2013 at 4:11 am

Looks like you made a good decision-I’m sure that I would have done the same thing if I was in your position. Plus you never know when your old employer goes bust or something might otherwise change with the 401(k) offered. However, you seem like you are doing well with that particular portfolio.

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retirebyforty February 13, 2013 at 11:08 pm

They made a big change in 2012 and it gave me another incentive to gain full control. You never know when they are going to change the program.

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Glen @ Monster Piggy Bank February 13, 2013 at 5:27 am

We have a thing called superannuation in Australia which is similar to the 401K (just with more rules and less flexibility) anyway, an average fund will cost you 1% of your total balance per year as a fee.
So if you have a largish balance say 500K to 1 mil you will pay between 5K & 10K in fees each year.

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retirebyforty February 13, 2013 at 11:10 pm

1% is pretty high. You don’t have any low fee funds like Vanguard?

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David W February 13, 2013 at 6:49 am

It’s too bad you can’t roll it over without quitting, I’m in the same position you were paying close to 1000/year in fees but will be locked into it until I leave my job.

Do you have any thoughts on better tax-sheltered ways to save for retirement while working? We’re already maxing out the roth accounts and were planning on maxing out our 401ks, but I’ve been looking for alternatives.

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retirebyforty February 13, 2013 at 11:17 pm

Rental properties – You’ll have to pay income tax on the rental income, but you won’t have to pay capital gain until you sell.
Dividend stocks – Dividend is still taxed at 15%. That’s lower than the federal income tax rate for many investors.
If you’re self employed, you can save a lot more with solo 401(k). Good luck!

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krantcents February 13, 2013 at 10:40 am

I never leave my 401K with a former employer because you lose control. Transferring provides more control and lower expenses or no expenses. There are certainly more choices in investments too.

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retirebyforty February 13, 2013 at 11:19 pm

Did you roll it over to an IRA or a new 401k?

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jim February 13, 2013 at 2:04 pm

Good choice to avoid the higher fees & expense ratio.

How does your asset allocation compare to the global diversified fund? If you’re 100% stocks and they’re a mix of stocks/bonds/ cash then they might not be underperforming based on assets.

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retirebyforty February 13, 2013 at 11:24 pm

You’re right. The Global Diversified fund is much more conservative than I am. It was less volatile than the stock market. My IRA is 100% stocks right now, but I’m planning to move 15-20% to bonds soon.

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Brick By Brick Investing | Marvin February 13, 2013 at 6:21 pm

Rolling over your 401k is paramount in order to maintain and build your wealth. I begged my father for years to roll over his 401k, he finally did it 7 years later. I still cringe when I think about all the fees he paid!

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retirebyforty February 13, 2013 at 11:25 pm

I had to cajole my brother to roll over too. I think it took him 4 years before he did it. :)

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Rob @FinancialSprout February 14, 2013 at 7:01 pm

I knew that 401k accounts were safe from lawsuits, but I would have thought that would have been the same for an IRA. Why aren’t IRAs protected?

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Brian February 15, 2013 at 4:42 am

Did you already have an etrade account? I’m just curious why you didn’t rollover to vanguard directly if you knew you were going to invest in vanguard ETFs (not transaction fees to trade vanguard ETFs when you have them in a vanguard account). Same is true with Schwab and Fidelity for their own ETFs. I guess if you thought you were going to invest in more than just Vanguard funds then etrade makes tons more sense.

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retirebyforty February 15, 2013 at 3:40 pm

I rolled it over to Etrade because they offered me $1,000 bonus. :) If I don’t have a blog, I probably would have just gone with Vanguard. However, going to Etrade first and then rolling over to Vanguard next year will give me extra things to write about. :)

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