By Eva Sadej
Blueleaf’s position: Roll over your old 401(k) into an IRA as soon as possible. IRA fees are both more transparent and lower than 401(k) fees, you have a much wider range of investment options, and it’s much easier to monitor your investments in an IRA than in an old 401(k).
Setting up a 401(k) is a piece of cake. You check off a box on a form at your company, and instantly there’s money taken out of every paycheck and deposited into a retirement account in your name. You can determine the amount you want to put away, and many companies even have a program where they match your contribution up to a certain percentage (usually 6% of your salary). Sounds great, right? You check a box, and you’re on your way to a more comfortable retirement: the very definition of a set-it and forget-it system.
However, it becomes harder to make good financial decisions when circumstances change. Let’s assume, for whatever reason, that you decide to leave this wonderful company at some point in your career. It might be voluntary, it might not be. But either way, you have to leave the company in which managing your retirement savings was so incredibly simple. What happens to your 401(k)? It stays behind at your old company, still in your name. If you leave your 401(k) behind, it becomes harder to change the allocation of your investments inside the account because you may have limited or no access to the forms or websites you need to change your investments. Even worse, you could potentially lose track of your 401(k) if your old company changes plan administrators.
There’s a simple, and relatively painless, solution to this “missing money” issue. Roll your money over into an IRA either before you leave the company or shortly thereafter. Your IRA then becomes attached to you and you alone, not to your company or some other entity that you might not know how to contact. This way, you always know where your money is and who to contact in regards to your investment mix.
Greater control over your investment portfolio is possible if you rollover your 401(k) into an IRA — with a 401(k), the only thing you can really control is how much money you put into the account on a paycheck-to-paycheck basis. Say you want to put your money in higher-risk, higher-gain individual stocks. You can do that with an IRA, depending on your risk tolerance and your long-term savings plan, but not with a 40l(k). There’s also many more low-fee investment options to take advantage of with an IRA, depending on who your account manager is. With a 401(k), often the only low-cost investment option you have is a simple S&P 500 index fund, and even that index fund may have higher fees and expenses than your run-of-the-mill S&P 500 ETF.
In the case of an IRA, most brokerage firms have either no management fee nor administration fee, or something very minimal — Zecco, for example, charges a $30 per year IRA management fee. With a 401(k) you are also not charged a management fee or an administration fee, but the average expense ratios per fund in your 401(k) can be much higher than the average expense ratio found in funds you would choose for yourself in an IRA, and these fees are subtracted from your performance. Now, it might not sound like a big deal, but 1% point difference per year is quite high.
Say you have $100,000 in your 401(k). Would you rather pay $30 as a yearly management fee plus $200 (0.2%) total asset based fee to Zecco and the ETF managers, or $1,200 (1.20% total asset based fee) a year to your plan administrator in the form of fund management fees? Even if you don’t get charged a direct fee, you can do the math: those 401(k) fees can add up to tens of thousands of extra dollars you don’t get between the time you stash money away in your 401(k) and when you finally retire and start taking disbursements from your account. Rolling over your 401(k) into an IRA isn’t only a way to improve your control over your money; it’s also a way to get more of it due to more investment options and lower fees.
As for the contribution limits, the limit on annual contribution to an IRA is low (only $5,000) and this is one of the main arguments against using an IRA as your main retirement strategy. However, this limit does not apply when your rollover your 401(k) into an IRA, and since you have terminated contributions to your old 401(k) by switching jobs, your contribution limit is unaffected.
There are only a few special case situations in which you would not want to rollover your 401(k) into an IRA. Do you see yourself requiring the option to borrow from your retirement assets? You can’t do that with an IRA and rolling over in the opposite direction, from an IRA to a 401(k) is a hassle.  In that case do not forget your final option—rolling over your old 401(k) plan into a 401(k) plan at your new company. You may, again, have fewer investment options than in an IRA, but more flexibility if your financial situation goes south. It’s an expensive option to keep open, however, and the more you have in your 401(k) plan at a given time the more you will be paying in fees, as 401(k) fees are hidden in higher fund costs and not quoted as transparent flat fees.
Or does your current 401(k) allow you to invest in special high-performance funds that you would not have the option of investing on your own? You may want to keep the money you have in your old 401(k) growing at that high rate. If not, and you don’t see yourself needing to borrow from the money any time soon, roll over your 401(k) into an IRA as soon as possible and take yourself out for a drink—you just saved over $10,000 dollars. http://benefitslink.com/modperl/qa.cgi?db=qa_401k&id=78