On To Greener Pastures
At the end of April I was laid off from my job of nearly 6 years. Don't worry though because we're in great shape to ride out this storm while I explore my options.
If you happen to be in the same boat as me or maybe you quit your job there's an important thing you need to take care of: move your 401k.
The process is pretty simple and usually just entails filling out a couple of forms. However, there's one big pitfall you want to avoid and that's not doing a direct transfer rollover. By doing a direct transfer rollover you never have the funds in your hand. Rather the funds are electronically sent to your new account at the new brokerage house into a Rollover IRA account. This ensures that all of your savings are sent to the new account and you don't make the mistake of neglecting to send the check in by the deadline. If you take the funds via a check then you could potentially be on the hook for a big tax bill the following year.
There's two big reasons to rollover your workplace retirement savings into another account.
It's well documented that expenses are one of the biggest drags on returns for investors and unfortunately many 401k plans don't have the cheapest options available to their employees. Assuming the same investment options and therefore similar returns here's how the expense ratio of the funds effects your end portfolio.
It might not look like it's that much, but keep in mind that this is under the assumption that you were comparing essentially equal investment options so the only difference is the cost. In case the graph doesn't appeal to you here's the numbers to prove to you the difference.
The comparisons are to the no expense option, although that's not realistic if you want to continue to invest in mutual funds/ETFs. The expense ratio comes out whether the fund increased or decreased during the year. The mutual fund companies are always going to get theirs. Talk about a great business model!
The bottom line is that expenses matter when it comes to your investments.
The other big reason to rollover your retirement savings is for flexibility. 401ks and other workplace retirement savings accounts generally have limited investment options. The typical 401k has between 10 and 25 different funds to choose from and as I mentioned earlier they don't have the cheapest options available.
When you are still working at a company that offers a 401k you are forced to work with what they have or find another investment vehicle. However, now that you've parted ways the world is your oyster. At the end of 2012 there were over 7,200 mutual funds you could choose from.
Of course if you're like me and prefer to invest in individual companies you increase your options even more. There's over 4,000 companies that are actively traded on the US exchanges and another 15,000 that trade on the pink sheets or over the counter.
Just by making the decision to move your 401k funds into an IRA you're able to increase your investment options from 10-25 to over 26,000.
My Plan Moving Forward
Over the next couple of weeks my plan is to look at some of the different options that I have of where to open up my Rollover IRA. I currently have assets at 3 different brokerage houses although a 4th might be in the works depending on what I dig up.
My 401k funds are currently invested in the mutual funds that were available to me although once I rollover the funds into an IRA I'll be investing into individual companies following my personal investment guidelines. As such I'll be looking for the best combination of commissions, account fees and signup bonuses. *Might as well take advantage of free money when you can, right?
Here's the current breakdown of my 401k investments.
I'm quite lucky in that my 401k plan had some relatively cheap options. At the current investment levels the weighted average expense ratio worked out to 0.31% and I could have gotten it even lower if I was a bit more conscious in my investment decisions.
The benefit of investing in companies individually rather than using mutual funds is that the middle man only gets a piece of the action twice, the buy and the sale, rather than every single year in perpetuity.
Have you recently moved your 401k investments into a Rollover IRA? What were the most important criteria in your decision?
Image provided by Stuart Miles via FreeDigitalPhotos