As featured in The Wall Street Journal, Money Magazine, and more!
     

Life After Salary: 401(k) Rollover

This article was written by in Investing. 13 comments.


A few months ago, I initiated the process to roll over my pension to an IRA at Vanguard. Leaving my job early, but after having worked at the company long enough to be vested in my pension, I chose to receive a lump sum of my accrued pension, about $18,000, rather a lifetime annuity of $65 per month. The transfer was finalized this week after a long delay. It’s time to turn my attention to my 401(k).

It often makes sense to roll over a 401(k) when you leave a job. I’m considering a 401(k) rollover to a discount brokerage to alleviate some of the problems I have with my former employer’s retirement plan. These problems are common among employer plans, even those managed by the same discount brokerages you’d likely consider to receive a rollover.

  • Management fees. Most employers’ 401(k) plans have expensive management fees. One third of the investment options in my company’s 401(k) have expense ratios over 1%. I am choosing Vanguard for comparison because most of my other investments are held there and the management fees are low. My 401(k) balance right now is a little above $100,000, so a difference of 50 basis points in an S&P 500 index fund is worth $500 a year. I normally wouldn’t throw $500 out the window.
  • Investment options. In my employer’s plan, I’m limited to 15 investments. That may be a larger number than what many other employers offer, but it’s a drop in the bucket compared to what I’d have access to if I move the 401(k) elsewhere. A brokerage can provide investment opportunities in the form of stocks, bonds, mutual funds, ETFs, metals, real estate, and more. All of these can be part of your IRA, in many cases allowing you to defer tax on your gains until you start receiving your distributions. My choice, though, is Vanguard, where I would choose to invest only in Vanguard’s mutual funds. Even this option provides more flexibility than leaving the funds in my former employer’s retirement plan.

Once you decide that you don’t want to keep your 401(k) at a former employer, you will need to decide the destination of those funds. These are the typical options:

  • A brokerage, providing the most investment choices.
  • A mutual fund company, like Vanguard, offering limited but low-cost choices.
  • Your new employer’s retirement plan, possibly offering limited and expensive investment choices.
  • Your bank account, possibly triggering income tax and penalties.

For the first three options, you can limit yourself to as small an amount of trouble as possible — rollovers seem to involve at least a minimum of some trouble — by initiating a direct rollover. This way, the funds are sent directly to the new retirement plan provider. There’s no risk of you accidentally keeping some of the funds. The fourth option should be considered only as a last resort. If the funds are designated for retirement you might as well leave them in an account that you can’t touch, avoiding extra expenses.

When you are considering a rollover, keep in mind the form of your funds in your 401(k). For example, some of my retirement funds at my former employer are in a Roth 401(k). When I move these investments to Vanguard, I will need to handle the rollover separately to ensure they end up in a Roth IRA. If you have an after-tax 401(k), these funds will need special consideration, as well. Some brokers and mutual fund companies won’t accept Roth or after-tax rollovers, so verify your chosen recipient can handle your entire 401(k) before you initiate any changes. I’ve found it helpful to speak with a representative at the company who can review your entire 401(k) to increase your confidence that you’re choosing the correct retirement plan options.

The last consideration should be whether your new asset allocation, after the rollover, should match your old asset allocation. My current allocation is a bit of a mess:

International 23%
Large Cap Growth 22%
Large Cap Value 22%
Real Estate 14%
Company Stock 8%
Mid Cap Growth 5%
Mid Cap Value 5%
Small Cap 1%

I could choose either to invest similar amounts in funds that roughly match this investment mix or just put everything into the total stock market index fund. This is the my current dilemma, and I’d want to decide what to do before initiating the rollover. It won’t hurt you in terms of taxes to transfer money from one fund to another within your 401(k), so take this opportunity to rebalance your portfolio.

These are the steps I plan to follow once I’m ready to begin:

1. Contact the recipient. In my case, Vanguard. I can either create a new account or roll over my 401(k) into an existing traditional IRA and an existing Roth IRA. I’ll need to make Vanguard aware that my former employer will be sending a check. In some cases, you can initiate an asset transfer. Regardless of the type of transfer, the recipient will offer instructions for sending the funds.

2. Instruct the former employer’s plan management. You may need to complete forms to be mailed in or you might have the option to submit your transfer request online. You’ll need the information provided by the recipient to avoid having a check sent directly to you.

3. Choose your new investments. Remember to look at your entire collection of assets when determining your optimal asset allocation. Your investments should also match the amount of risk you’re comfortable with.

4. Verify your transfer is complete. Although I initiated my pension rollover in February, it wasn’t complete until the end of April. The process was long, but both companies completed the process as they agreed. I expect the process of rolling over my 401(k) will be somewhat faster.

Published or updated April 27, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

Email Email Print Print
avatar
Points: ♦127,485
Rank: Platinum
About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 13 comments… read them below or add one }

avatar MC

Why such a low participation in Small Caps? And why so heavy in International?

I don’t have a lot of options myself but in 2008 I re-balanced (not really balanced) positioning myself heavy in Small Caps:

I positioned 75% in Small Caps:
50% in PSCZX
25% in ARTVX

Then the remainder in Large:
25% in HACAX

The returns have been great (9% YTD, 24% LY, 40% LLY) but now I’m thinking I need to rebalance again.

Other options, Stable Value fund, PIMCO Bonds, S&P Index fund, Large Cap Value American Beacon and then a Life Path fund that is a retirement target date.

I know I’m over indexing in aggressive but being 32, for my 401(k) that seems somewhat appropriate.

Love to hear other thoughts.

Reply to this comment

avatar Luke Landes ♦127,485 (Platinum)

I’m not a big fan of the small cap fund that was available to me…

Reply to this comment

avatar MC

I also have MFS International Equity MIEIX available.

Reply to this comment

avatar Little House

Did you happen to look into a SEP IRA instead of a traditional or ROTH? I know you still have to figure out how to allocate your funds that will benefit you best, but SEP IRA’s are for the self-employed and have a much higher contribution limit. Just curious.

Reply to this comment

avatar Luke Landes ♦127,485 (Platinum)

The SEP IRA, or at least the employer contribution part of it, is in addition to the traditional or Roth IRA. But this year, I stopped the SEP IRA in favor of the Individual 401(k).

Reply to this comment

avatar Ceecee ♦53 (Newbie)

I learned the hard way not to let the money pass through your hands. I carried the check from one bank to another and got audited by the IRS. It’s happened to many people. Their computer often doesn’t pick up that it is a rollover and reads it as a distribution. Ouch.

Reply to this comment

avatar Robert @ The College Investor

I have been trying to roll-over my dad’s 401k from T Rowe Price to Fidelity into a IRA. T Rowe Price was horrible to deal with. I finally went over to Fidelity, and asked them if they could handle everything, and they sad they could. About 2 days later my dad got a call from T Rowe Price asking them why he was leaving, as they don’t like to lose high-dollar accounts. We told them about their awful service, but they didn’t seem to care.

Reply to this comment

avatar Financial Independence

Just a two facts, as food for thought:

- Only 202 of the 500 biggest companies in the United States in 1980 were still in existence 20 years later.
- On December 29, 1989, Tokyo’s Nikkei stock average reached its all-time peak of 38,915.87. Twenty years later, the Nikkei has never again reached that level — and, in 2009, reached a new low of 7,054.98.

Reply to this comment

avatar MacroCheese

I wonder if this is as much a result of acquisitions, mergers, etc. as anything else?

Reply to this comment

avatar Evan

Out of curiosity what do you suggest then?

Reply to this comment

avatar Pat S.

Great point about considering the cost of rolling over your 401(k). Sometimes your investment options and expenses are lower in your old plan. Too many people just do it without considering these factors.

Reply to this comment

avatar lynn ♦155 (Cent)

All of this is behind me now. Thank God!

Reply to this comment

avatar skylog ♦368 (Nickel)

…and it may soon be right in front of me. sigh.

Reply to this comment

Leave a Comment

Connect with Facebook

Note: Use your name or a unique handle, not the name of a website or business. No deep links or business URLs are allowed. Spam, including promotional linking to a company website, will be deleted. By submitting your comment you are agreeing to these terms and conditions.

Notify me of followup comments via e-mail. You can also subscribe without commenting.

Previous post:

Next post: