In these turbulent financial times, people have lots of questions about their personal finances and investing their money. Here’s one reader’s question:
I have a 401K of a high six figure account and I am thinking of rolling it over to an IRA.
I am retired and feel that this may give me greater options. I would appreciate your advice. We do not use this for income.
Thank you for your response,
It is often the case that a retiree will leave his or her retirement account with their prior employer after they retire. The reason most often given boils down to inertia…or rather the lack of inertia. If you’ve never opened a new brokerage account and initiated a transfer of funds from one account to your new account you might think the task is daunting, however it is quite easy. The new brokerage firm will help you through the process from start to finish.
The two best reasons for moving your account are reducing expenses and increasing your investment options.
Reduce expenses. What most employees don’t know is that there can be a lot of expenses associated with an employer 401k plan. First are the expenses imbedded in any mutual fund. Known as the expense ratio, they range from a low of about two-tenths of one percent, typically for index mutual funds, to a high of about 2% with the average being 1.3% to 1.5%. In addition to mutual fund expenses, there are also plan administration fees related to required record-keeping as well as, in some cases, consulting fees. In the old days, the employer paid these fees but many companies today pass these fees along to plan participants and these fees can dramatically affect your end results. If our reader, L.R., had $750,000 in his 401k plan and the ‘added’ expenses were one-half of one percent per year, the negative impact could exceed $300,000 over 25 years! If you want to know just what fees you’re paying in your 401k plan, you may find it difficult to get a straight answer because often all of that information may not be available in one place. By rolling your 401k plan over to an IRA, you can eliminate the administrative fees and you’re in a position to choose mutual funds with low expense ratios. Or you could buy individual stocks and bonds and further reduce your ongoing expenses. Be sure to consider a discount broker such as Charles Schwab (www.Schwab.com) or Vanguard (www.Vanguard.com). As I’ve written about many times in this column, I like blue chip dividend-paying stocks where you invest in great companies and hold them as long as they remain great; companies like Southern Company, AT&T, Exxon and Kimberly Clark. These companies have a history of paying good dividends and raising their dividends over time. You’ll need a minimum of ten to twenty companies for a diversified portfolio.
More investment options. Today, most 401k plans do a pretty good job of providing participants a relatively robust list of diversified mutual fund investment options. Still, the list is limited to a few dozen options. Once you rollover to an IRA, you’ll expand that list thousands of options. With investing, more options is a better strategy and you will have expanded your choices beyond mutual funds to include a wide variety of investments including individual stocks and bonds.
So I encourage L.R. to rollover his 401k plan to an IRA and either build his own retirement portfolio or seek the guidance of a professional.