Reader Comment: My daughter has a 401k match from her employer. Her total salary is $20K and the match is 3% if she puts in 5%. The fees and options are not as good as she can get without the restrictions of her employer plan. For a start, they do not offer a Roth option. Additionally, the match is not vested for 5 years and she may not be there that long and so she would not actually get the match. The general financial media says, “Always max out your employer match.” I think she is better off in a Vanguard Roth- low expense ratio and wide options. Can you counter this “max the match” myth in your column or tell me why I am wrong and the media gurus are right?
My Response: I happen to be one of those writers who are also shouting the mantra, “Be sure to capture your company’s matching contribution!” But of course you are correct. Some company’s matching contributions to the 401k do not immediately ‘vest’. You are also correct that in virtually every case the variety of investment options are greater in a non-401k plan such as an IRA or Roth IRA through a discount broker such as Schwab or Fidelity. You should determine how your company 401k matching contribution works and how quickly it vests (becomes yours) before deciding to invest.
Reader Comment: I saw your recommendation to roll funds to Vanguard as well as others; however, I have been told if I have more than $50,000 in Vanguard funds, Vanguard may decline my request to liquidate or go to cash if the market might decline as it did in 2008. I am worried about this risk.
My Response: I had never heard this so my partner, Michael Wagner, CPA, called the folks at Vanguard for their response. Don Bennyhoff, senior investment analyst, Vanguard Investment Strategy Group, had this to say, “Vanguard has what we call large or qualified transaction limits– usually measured at the $100K+ or the $1M+ level depending on the fund and reviewed on a daily basis. The reason for this is to manage cash flow and protect the existing shareholders of a fund. We would honor a transaction at the $50,000 level and we expect to be able to honor most transactions without disruption to the fund and the existing shareholders in the fund. Vanguard does, however, have a frequent trading policy in order to ensure excessive transactions do not disrupt management of a fund and increase the fund’s costs for all shareholders– each fund limits an investor’s purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. If flexibility is important to an investor, we would recommend ETF Shares of a Vanguard fund, which are not subject to these frequent-trading limits. Vanguard encourages clients to maintain a long-term perspective and discipline which can help investors remain committed to their long-term investment goals, especially through periods of market downturn. History shows that the worst market declines have led to some of the best opportunities for buying equities.”
Reader Comment: In regard to your article in the Mobile Press Register on June 28th, I find it difficult to believe you never mention an annuity as a source for your 401k rollover funds. The hybrid annuity is a great vehicle for clients looking to minimize fees and cost. This is a better product for lifetime income without annuitization and most have the added benefit of nursing home coverage. I am an independent financial advisor so I feel it is my duty to reply to your article. Thanks.
My Response: While annuities can certainly have an appropriate place in retirement planning, I’ve never been a big fan due to their complexity and often high expenses and fees. Dr. Don Taylor, PhD., CFA, CFP, CASL writing for BankRate.com summed it up well: “Retirees already have an inflation-indexed annuity designed to last a lifetime, with benefits paid to a surviving spouse — their Social Security benefits. Since hybrid annuities have long surrender periods, with high surrender fees to unwind a contract, I’d counsel seniors considering these investments to get completely comfortable with the contract design and provisions before signing the contract. When in doubt, hire an independent fee-only financial planner to review the contract prior to signing it.”