Last fall I decided roll over a 401(k) from a previous employer to my current plan.
About four years of savings were in an account with Fidelity, while another two were in an account with Vanguard, and I wanted my money together in one place.
I struggled with the process, to say the least. The return contribution form was confusing and two five-figure checks I mailed to Vanguard got lost in transit. From start to finish, it took me five months to combine my retirement money into one account.
The has written about the saga and asked the certified financial planner Brent Weiss to weigh. What went wrong? Was my experience an anomaly? Why am I receiving physical checks in the mail from one financial institution and then forwarding them to another – when I can wire money to someone on the other side of the country in minutes via Zelle?
Weiss answered all my questions and then some.
Turns out, the process is archaic for a reason: There’s no incentive for a 401(k) provider to invest in the technology to allow you to easily move your money out of their platform. Ultimately, “how they make money is based on the amount of money on their platform,” Weiss explained, adding, “Follow the money, follow the incentive.”
And while my five-month-long case may have been a bit on the extreme side, he assured me that I’m not the only person who has struggled with a 401(k) rollover: “Your instructions for doing this are extremely confusing.” Even for financial planners, it can be “a pain in the back.”
He also told me that doing a 401(k) rollover isn’t necessarily the smartest financial move for everyone. This was news to me. I assumed that consolidation was always the right choice.
He said it’s usually, “When you suddenly have two plans and then you change jobs and you have three or four plans, you inevitably forget two out of three or three out of four, and that’s not good for your money. Consolidation can be a great decision if it helps you take action on your plan and make sure you’re monitoring and reviewing it.”
However, he noted that there are two important factors to consider before starting a comeback.
1. What are the investment options?
Before moving your retirement money, consider the investment options in your current plan (or plans if you have multiple accounts) and the new plan.
“The average 401(k) plan only has about 15 to 20 investment options, so we want to look at those options: ‘Are they good? Do we want our money in this?’” Weiss said. “At the end of the day, when your accounts get to a certain size, you really want to make sure you have the ability to invest well and be broadly diversified.”
I told him my money was invested in a target-date retirement fund, which he approved: “For people without a financial advisor, I think target-date funds are great because you’re getting a fully diversified strategy . If you choose the right retirement date or target date, it should be risk-appropriate for you and is low-cost and automatically rebalanced. All you have to do is contribute to the plan and everything else is taken care of.”
2. What are the fees?
The next question to ask about your new plan is, what are the fees?
High fees can be devastating to your 401(k) savings. over a long period of time. The main ones to look at are plan administration fees, individual service fees and investment fees.
Figuring out your fees takes a little digging. Your employer is required to provide you with information on the company’s 401(k) plan, including the fee structure. You can also check your plan prospectus online.
It’s worth looking at your plan’s rates even if you’re not making a return. In some cases, high fees may outweigh the benefit of using a retirement account instead of a standard investment account.
While I didn’t ask either of these questions before starting a recovery, I got lucky.
“Since you’re with Vanguard – they’re one of the lowest cost providers and they also offer you some very good investment options – my guess, without seeing your account or understanding your plan, is yes, it was a great move, Weiss told me. “But it’s plan-specific when I say ‘yes’ or ‘no’ to putting money into a new 401(k).”
If my old plan had lower fees or better investment options than the new one, I would have been better off leaving my money there, he said.