Long gone are the days of staying as a worker-bee drone for your career for the pension at the end of the rainbow. Even if that is you, many pension funds are underfunded which means they are unlikely to fulfill your promised future money obligation upon retirement. Given the opportunity, most should be finding other tax advantaged ways to save for retirement. About 55% of workers have access to a 401(k), and a bunch more government employees (457(b)) and teachers (403(b)) have access to similar programs
I recently read that most people change jobs 11 times in their lives these days. That may be high, but every 4-7 years is pretty common interval I’ve seen. If you did participate in your past employees 401(k) or equivalent, it is really easy to simply just leave it there and let it ride. Meanwhile, the vampires of the both the funds you have your money invested in, as well as the plan administrator, are silently sucking off fees making your gains grow much less. At first, it may not seem like much, but the power of compounding over years can make that 1.5 or 2.5% higher fees huge! From my 5 Laws of Personal Investing post:
Many [fees] are 2-3%, which means your fund needs to consistently perform above the “market” to do as well as “the market” (see index funds below). Eroding your returns by 2-3% is huge, take for example an 8% return versus an eroded return of 5.5% (2.5% less) return off an investment of $10,000 over 30 years. The 8% return (from an index fund) over that duration yields approximately $109,400, and the 5.5% return yields only $51,900, less than half!
So rolling over a 401(k) may sound intimidating but it’s really not. I’m going to share my past and very recent experiences so that you may learn from me and my mistakes.
Like most, when I left a position a few jobs ago that I worked at for about five years, I let my 401(k) ride because I was too lazy or intimated to figure out how to roll it over into an Individual Retirement Account, or IRA. My fund choices in the former employer’s 401k I’m sure were ok, and asset allocation were ok, but I’m sure it was being slowly sucked of returns by the aforementioned fees. It wasn’t until I left my last job position (another 5+ year run) that I got my shit together. While I knew what I wanted to invest in (Vanguard Index Funds – Note: I have no affiliation or receive no compensation from Vanguard in any way, I just like them as Bogleheads are prone to do), I was still intimidated by going directly to a large mega-investment corporation like Vanguard. Instead, I went down to my local Scottrade (discount national brokerage firm) office in person and they helped walk me through the process. It was actually really easy. Steps are basically:
- Open up an account at brokerage firm of your choice
- Call your past 401k administrator and ask for a direct rollover form
- Fill out form, it will direct you into what account/firm you want to send it to
- MAKE SURE IT IS A DIRECT ROLLOVER! IF NOT YOU RISK PENALTIES AND TAXES! I can’t stress this part enough.
- They will likely send the check directly to the firm, in care of “You.”
- The firm will deposit the funds into your account, at which point you can purchase whatever you’d like to populate your account with
- I would recommend a basic “Lazy Portfolio” made up of ultra-low fee index funds from Vanguard, or a Target Date fund from them. Figure out your risk tolerance (the stock/bond mix essentially, bonds being a more conservative choice, equities being riskier, and factor in your time frame until retirement and how scared you are when the market doesn’t do well), do a little research, set it and forget it.
I used this exact approach and it worked well. In deciding the “perfect portfolio” to populate my IRA, I stumbled across this article: Merriman’s Ultimate Buy and Hold Strategy by Paul Merriman and Rich Buck. It made a lot of sense to me (was essentially a diverse portfolio of certain weighted mutual funds and bond funds) and allocated roughly according to this plan, primarily with Vanguard mutual funds. It has performed very well (what fund hasn’t these days), but reallocation or adjustments of a dozen funds was cumbersome and included trading fees that I didn’t like. Still, I could have chosen a lot worse. I think that portfolio, plus a couple of small slices of active managed funds I liked and some other ETFs that I couldn’t get as Vanguard, my overall cumulative weighted fee (no extra charges from front or back-end “loads”) was something 0.38%. Not too bad but I knew I could get it lower.
But I finally got sick of so many funds and thought that I could squeeze even more juice out of the orange by reducing fees, thereby increasing more of the return that goes into my pocket. So I called up Vanguard (the “New to Vanguard” number on their website) and they answered all my questions then proceeded to walk me through everything with one of their concierge persons. They were able to help me open up new IRA accounts directly over the phone and facilitated a direct transfer (funds from Scottrade went into new IRA accounts as same fund) without having to liquidate the other IRA (and incur more fees). Then, all funds that were already in Vanguard accounts could be rolled into Ultra-low fee Admiral Shares without any further transaction fees.
It was a very painless experience and one that I would recommend to others. As such, my cumulative expense fee for my portfolio has dropped to the micro 0.08% (less than $1 on a $1,000 basis). So what sort of difference does 0.3% (the difference from before and after) make? In 22 years (when I could access the money),for every $100,000 invested right now, I make an extra nearly $7,000 during that time frame (7% more than my past allocation’s fees). So even that small change can help.
So hopefully you aren’t letting your old 401(k) get sucked little by little by your past employer’s fees. Realize that if you rollover to a brokerage firm or company like Vanguard, they may very well have minimum investment requirements (often $1,000-$3,000 can get you in the door at most places), but at least the money you have will increase for your benefit, not some plan or financial manager’s benefit.