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Where’s The Best Place to Roll Over a Retirement Plan?
By JLP | December 13, 2006
I recieved the following email from a reader:
I really appreciate all the information you have up on your site. It’s really helped me understand a lot of financial things that I didn’t get before. One thing I’m still struggling with. I’m getting ready to roll over my retirement plan from my state sponsored plan at an old job to a traditional IRA. The thing thats slowing me down is that I don’t how to choose a company to go with! What sort of fees do I need to be on the lookout for? Is there really much difference in return between the different companies? I know you’ve discussed T Rowe Price and Vanguard a few times, but what makes them good? Thanks so much for all your work and your willingness to share it!
I emailed her and asked how much she had to roll over and she said it was around $3,000.
My Thoughts
First off, thanks for the two introductory sentences. That tells me that I’m accomplishing what I set out to do with this blog and that’s to educate and inform people about personal finance.
Now, to answer your questions…
Choosing a place to rollover your money can be scary. As I see it, you have two or three options:
1. Don’t move it
2. Roll it over to a mutual fund family
3. Roll it over to a brokerage firm
Now we’ll look at each one.
Don’t move it
Most likely this is not a good choice as a lot of retirement plans don’t offer much freedom of choice and their investment choices may be fee-ridden. However, with your money being in a state-sponsored plan, you might have better (less expensive) investment options, which might not make staying in the state-sponsored plan a bad choice.
Roll it over to a mutual fund family
Personally, I don’t think you can go wrong with either Vanguard or T. Rowe Price. Both are great mutual fund families. Vanguard has a $3,000 minimum and will also charge a $10 per year maintenance fee on accounts less than $5,000 as well as an index fund fee of $2.50 per quarter or $10 per year (depending on the fund). You can read more about the fees here. I searched the T. Rowe Price website and could not find any fees assessed on accounts. However, their mutual funds do have minimums (usually $1,000 for an IRA) and their expense ratios are higher than Vanguard’s.
Roll it over to a brokerage firm
Finally, you could roll your account over to a brokerage firm like Scottrade. You would then have to pay commissions of $7 on each trade you made (or $17 each time you purchase a mutual that is not on their No Load, No Transaction Fee Mutual Funds list. You could then purchase stocks, exchange-traded funds, or mutual funds inside your IRA.
Hopefully I did a good job explaining some options you have available to you. Of course, these aren’t your only options but you asked me for my opinion and that’s what I tried to deliver. Best of luck to you.
Topics: 401(k), Basics, Financial Planning, IRAs, Index Funds, Investing, Retirement Planning | 14 Comments »
December 13th, 2006 at 12:35 pm
I generally recommend opening a full-service brokerage unless you know for a fact you only want to invest in one fund company. I don’t like being bound to one fund because there are occasionally other investment options you may want to take advantage of, but then without opening a separate account you are stuck with X fund family, and I hate having more accounts than necessary.
With most brokerage accounts you are able to buy virtually any mutual fund available, load or no load, stocks, bonds, ETFs, REITs, money markets, etc. Also, most companies now allow systematic investments into funds without the transaction fee for each purchase, which could virtually nullify the reason to go with a fund company directly if you plan on making additional purchases.
If you know you only want to dump your money into X fund and leave it there, then obviously that may not be the best option. But if you want to take advantage of the various investment vehicles available to you and the have the simplicity of one account for everything then a brokerage account may be right for you.
December 13th, 2006 at 4:04 pm
In the above example, I would be careful about option 1 (leaving it with your old employer). Sometimes these plans will automatically cash you out and withhold taxes if you have less than a $5,000 balance. Although, I think that rule has changed recently and now it’s less than $1,000. That being said, most young people with a few thousand dollars cash out their 401ks b/c they don’t think it’s enough money to make a difference. It DOES, and understanding the time value of money is crucial to being a good saver.
Option 2 (rolling it to a mutual fund family) I would think makes the most sense b/c you get automatic diversification through mutual funds. $3,000 is a tiny rollover, and putting it into a brokerage account could whack you with transaction costs and fees.
Option 3 – I agree with Gen X about the flexibility and versatility of a brokerage account. You can use any investment allowed by the custodian. For a big account, it’s a no brainer. Use ETFs for your broad market exposure and you could make out even cheaper than with a Vanguard or T. Rowe Price. But watch out with $3,000. If the brokerage firm charges an IRA fee (some charge $25.00 – $50.00 for this) and ticket charges for each purchase, you could throw away 5% of your account in fees.
December 13th, 2006 at 11:36 pm
T. Rowe Price also charges $10 IRA fee for balances under $5,000. See http://www.troweprice.com/common/gcDefault/0,2955,lnp%253D10232%2526cg%253D920%2526pgid%253D7769,00.html.
“A low $10 fee per year is charged for each IRA mutual fund account under $5,000. The fee helps offset costs for IRA record keeping, tax reporting, and account servicing.”
I think a Vanguard LifeStrategy or Target Retirement fund will work well for this reader.
December 14th, 2006 at 9:56 am
Can someone comment on a possible 4th option of rolling over into your current employers retirement account. I have several 401ks from former employers that I have been debating if I should roll over into a IRA at a brokerage account or rollover into my current employer 403b. It’s a similar problem as discussed above where I could be in full control of investment options with a IRA but I could have the peace of mind of my current selected/allocation of investments with my current employer. Since I am married with three young kids about to enter Grad school it’s a toss up about how much time I can spend following individual investments from my IRA.
Any comments on my situation?
December 14th, 2006 at 10:32 am
If your current employer has some good low-cost fund options, then yes rolling it into your new employer’s plan is a fine option. If you have a smaller plan with limited options and expensive funds, even though it may be more work to keep up with your investments, it will save you money.
So there is no right or wrong answer really, it just depends on what your current fund offers. Some companies offer great funds with low fees, others don’t.
December 14th, 2006 at 10:42 am
Walterg,
You raise a point that I didn’t even think about and that’s moving it to a new employer.
I would only move it if you like the investment choices available at the new employer. However, remember that once you make the move, there’s really no backing out.
Finally, I don’t see how having it in a brokerage account is any more work than an employer plan as long as you have an asset allocation plan and stick to it. Also, remember you can use those target funds which basically allocate for you. I’m not a big fan of these funds because they seem to hold too much in bonds, but some people like them.
Thanks for the comment.
December 14th, 2006 at 10:46 am
I agree. My biggest fear is that I rollover to my current employers 403b (a large state university where Fidelity is the provider and good mutual fund options too!) but latter in life wish I had moved it to my Reg-IRA account where I can probably beat the a S&P 500 index with a group of 5 high quality dividend-paying stocks and some time investment.
December 14th, 2006 at 11:38 am
How right you are Walterg… and you always have the option of buying the same Fidelity funds found in your 403(b) in your brokerage account if you felt so inclined. I like your method- five carefully selected value stocks. I know which ones I’d go for
December 14th, 2006 at 2:47 pm
My wife just changed jobs and had approx the same amount in her 401k. We did a rollover IRA to T Rowe Price and the process couldnt have been smoother. Some 401k administrators (Merill Lynch) require that you personally have to call/via website have to initiate the roll over. My wife got a really nice call from one of the specialists at T Rowe Price informing her that they tried to initiate the transfer but cos of Merrill Lynch’s policies she’d have to initiate it. But once that was done, the rollover happened within a week. ML also charged a fee of 25$.
December 15th, 2006 at 6:21 am
Star Money Articles for the Week of Dec. 11
Here are interesting posts and news this week from the MoneyBlogNetwork members and beyond: AllFinancialMatters advises on the best place to roll over a retirement plan. MightyBargainHunter lists 118 ways to save money in college. Five Cent Nickel list…
December 15th, 2006 at 1:13 pm
I’m waiting for zecco.com to offer IRA’s. Commission fees may someday be a thing of the past for people who don’t need overpriced advice!
August 21st, 2007 at 3:38 pm
I am nearing retirement and am thinking of rolling my company sponcered 401k to an agent with New York Life.
Could you advise me on if this is the proper way to go or are there better options. Also what kind of maintence fees are common.
July 2nd, 2008 at 11:49 am
I am turning 62 in September this year and retiring from my second job on 1 November this year. I have a 401 through my current employer and company stock that will be available this year for a roll over. It is around $190,000 and an additional amount year to be allocated may be provided next year. I have signed up for social security effective 1 November, but am limited to earnings of $14,000. per year in the future to avoid affecting my social security. My questions are what should I roll over my funds into so that I can make a decent return yet have access to my funds for other investements. I want to withdraw funds next year to buy a house to rent out. When I withdraw those funds will they affect my social security or is that not considerd earnings? I also have some funds in the government thrift savings plan, metlife investments, and a CD type investment. I would appreciate any advice.
Leonard Bynum
June 30th, 2009 at 8:47 pm
Great advice and i like how you present the 3 different options.
I wrote a post about choosing the Best Rollover IRA that you might find useful as well!