Have you left an employer and had to face the question as to what to do with your 401k? In the most simple of scenarios, you can either keep it with your old employer indefinitely, or you can roll it over to a different account.
When rolling over a 401k, you have the option to roll it over to a new employer, to a special rollover IRA, or to just a regular IRA. The IRAs that you roll it to could be held almost anywhere. They could be with your financial advisor or planner, or they could be held at a discount broker.
So, the question we want to answer today is, Should you roll over your 401k?
First, the reason I wrote this article is because I just read an article about not rolling over your 401k. It was written by Anna Prior at Smart Money and here is what she had to say about whether you should rollover your 401k from your old employer’s account to an IRA:
Figuring out the answer can be tricky, advisers say. The desire to have all the pieces of a nest egg in one place is only natural. Plus, many brokers and others in the retirement-planning business advertise the virtues of consolidating far-flung retirement accounts. “Financial-services companies would love to get me to roll over my money and get it under their roof,” says Francis Vitagliano, a researcher at the Center for Retirement Research at Boston College. However, the best option for many people, say advisers, might not be the obvious one.
While perhaps counterintuitive, many pros say the “lazy choice” could indeed be the right one — and that is to leave the money in your former employer’s plan. For one thing, it’s likely to be cheaper than rolling it into an individual retirement account. The fees for 401(k) plans at large employers are about a third of what they’d be in a comparable IRA, says Kristi Mitchem, senior managing director and head of global defined contribution for State Street Global Advisors. Investors in large plans also have the benefit of a fiduciary who manages the plan and, at least in theory, picks the best products for participants.
The rest of this article can be found at http://www.smartmoney.com/plan/careers/a-new-trick-dont-roll-over-your-401k-1309379220563/.
Okay, so I read the entire article and to be honest, it doesn’t make a good case at all for not rolling over your retirement plan. At least that’s my opinion. And here’s why I disagree.
First of all, your old employer 401k, if its like most 401ks out there, only offers a few investment choices. That means that you only have to revisit your portfolio every year or so to rebalance and switch between available funds. Most 401k plans don’t have a good variety of investment choices. By rolling it into an IRA, you can have unlimited access to all of the funds and stocks available on the market today.
Second, Smart Money argued that it is often more expensive to manage it yourself in an IRA than in a 401k account. I disagree. Setting up an IRA or a Rollover IRA is absolutely free. A few years back, I set up my rollover account at etrade. It was completely free and I was able to choose from ten thousand investments instead of just four or five. The only costs incurred are for trading, and those barely add up to anything. In fact, by being able to invest in low cost funds like Vanguard and T Rowe Price, I probably save at least one percent in mutual fund fees each year. Savings like that actually add up to a lot over time.
Now that I’ve disagreed with the article in general, I’ll list a few points where I could agree with them.
First, I would agree that if you were going to rollover your account to a financial advisor or planner, that it would be much more expensive. However, think how easy it was to choose investments in your 401k. It’s still that easy to do it yourself in a self directed IRA. However, if for some reason you feel like you need an advisor to handle your account, it probably would make sense to leave it at your old company.
Second, if you have moved to a new employer and they have a really crappy 401k plan that doesn’t have very many investment choices, it also makes sense to not rollover your account. However, in this scenario you could still roll your account into a self directed account at your favorite discount broker and get complete control over your investment selections.
Anyway, I think I’ve answered the question. And the answer is, almost always, yes, roll over your 401k. At least if you can manage it yourself.