View Full Version : Rollover in new 401k vs. IRA
06-14-2004, 02:56 PM
I just switched jobs for the first time and am having trouble finding information on what to do with my prior company's 401k fund. From what I can tell I have 3 options:
1. Qualified direct rollover of prior 401k with JP Morgan/American Century into new 401k plan, mostly with Vanguard.
2. Rollover of prior 401k into IRA, totally independent of new company
3. Do nothing. Old 401k will stay in fund and continue to earn interest.
Is there any reason I should definitely do one of those options, assuming I've got them right? If there are no disadvantages, I would rather consolidate everything into 1 fund, and thus choose option #1. How would I go about doing this though? Do I need to contact my former companies HR department? I couldn't find anything on JP Morgan's website.
06-14-2004, 03:11 PM
If you want the security of being able to borrow against your retirement assets in an emergency, and your new 401k allows such, that is an item to consider.
Money can always be rolled into an IRA but it cannot be reversed. Therefore, this option is useful for "no turning back", and the ira allows certain hardship withdrawals. If you consider the investment alternatives in an IRA to be superior to your company's 401k after-hidden charges return or you feel you might need the money without being forced to leave your current employer, then the IRA may be superior.
If you get a big head whereby you are otherwise emotionally affected by having your assets in one big pile, or feel your prior 401k offers superior investment vehicles, then leave them there.
From a practical point of view, there are often months involved in these transactions, and that needs to be considered in your access considerations, especially if there is any risk of your prior company going belly-up and you losing contact with where the money resides.
I know probably none of the points mentioned are in the common literature, but my purpose is to try to expose items not part of most salesmen routines.
06-15-2004, 10:27 AM
Also, given the turnover in this field, you will probably be changing jobs a number of times. If you set up an IRA now, you can roll each 401k into it and consolidate as you move through your career.
06-15-2004, 02:11 PM
I've done this several times, each time consolidating it into the new employer's 401(k), for simplicity of record keeping. As noted above, you can borrow against your money when it is in the new employer 401(k). A second subtle advantage is that if you choose to retire before age 59.5, the 401(k) can be withdrawn in equal annual payments starting as low as age 55.
As far as rolling it into the new 401(k), first you work with your new employer, who can provide forms to fill out to mail to your old employer. You want to make sure you don't have the check made out to you - that would create a taxable event.
If the new employer doesn't accept rollovers, it is acceptable to put it into an IRA, and when you switch jobs again, it is be possible to roll the IRA into the new 401(k), as long as you haven't comingled the money with any other types of contributions. I've actually done this.
06-15-2004, 05:06 PM
Management fees and expenses are typically much higher in a 401-K, sometimes outrageously so. This would strongly favor rolling into an IRA account rather than putting or leaving it in a 401-K account.
06-15-2004, 05:33 PM
Do NOT roll it over into a new employer's plan. Once it's in there, you're stuck unless you leave the company. I made that mistake with a six-figure rollover from a previous job. The new employer's investment options looked OK but the results were awful once I put my money in. (Story of my life. If I buy something, you should sell it short.) One of the happiest days of my life was getting the $$ back out after I left the company for other reasons. It is now in a brokerage account and I'm happy with how it's being managed- but my advisor and I both know that if I'm not happy, I can pick it up and move it somewhere. Since I'm his biggest account (I've been working for a lot of years and have been disciplined about saving), his behavior towards me is described by my husband as "obsequious". Far better than being a tiny percentage of my employer's plan.
Any brokerage (doesn't have to be the one managing your old employer's account) will be delighted to tell you how to roll over money from an employer's plan into an account with them. Many have downloadable forms on their Web site. Much easier to initiate this move with the receiving party, since they have a stake in making it go smoothly.
06-16-2004, 10:32 AM
Thanks for the advice, everyone.
I'm not too concerned with management fees. I can't imagine my new 401k plan rips me off more than my old one with JP Morgan. Also, I never saw any fees deducted from my old plan. If it's like .1% or something wicked small like that, who really cares?
So I guess the only really issue is the investment options on the new 401k. I think these should be satisfactory. It's with Vanguard and the options include Vanguard's S&P 500 index, Wellington, Windsor, Bond Index, PRIMECAP, and Money Market Funds. Also, a few Fidelity and Janus equity funds. Basically, a ton of options. My old 401k with JP Morgan had only 5 choices: Letters A-E with A being all fixed income, E all equity and the rest mixtures. They never even told you what funds they were investing in. It seems to me that my new 401k options are a big upgrade.
06-16-2004, 12:02 PM
If there's any chance of you being out of the job market sometime in the near future (grad school), roll it into an IRA. Then when you aren't earning anything much, roll the IRA to a Roth IRA.
Presto! A great, legal tax shelter.
06-16-2004, 12:38 PM
While I agree that your new plan sounds like an upgrade, you should still do some research. You probably won't lose much leaving everything with your old employer for w few months while you do some research.
You asked about 401(k) charges. Let me give you some round numbers from the plan of a small company for which I worked (about 50 employees). In 2000 or 2001, one of those disastrous years when the dot-com stocks died, the plan had a balance of about $600,000 at year-end, which reflected losses of about $100,000 and fees of $27,000. My share of that plan included a rollover from 10 years with a previous employer so I had a huge stake in the results. Keep in mind that not only are they raking off the fees for their brilliant choice of funds and for "management", but the funds themselves are raking off annual fees. There are obviously a lot of variables here. If all the participants in the plan had invested in a straight technology fund those results would have been expected. I'm not sure what mix of investments produced those results- I was 50-50 in stock and money market funds. This was also a very small employer, so the charges as a % of assets would be higher.
You should be able to get a similar report from HR for the overall plan to get an idea what the 401(k) manager is charging and then research the individual funds and compare them against similar funds. You're right that a charge of less than 1/10 of a % is not a big deal today, but over the period you have between now and retirement, the choices you make can have a huge impact on the bottom line, thanks to the magic of compound interest.
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