Parts of this post have been redacted due to the author’s wish to remain anonymous.
These days, every dollar counts. You may be leaving value on the table by parking money in an old 401k plan. It may be time to cut the cord.
Even though the fees are invisible, there is a cost for investing in a 401k. The Department of labour has only recently ruled to give participants greater transparency about the fees and expenses that plan participants are bearing. In many instances, the 401k plan deducts fees for recordkeeping, legal support, accounting, etc. These fees continue to be charged, even after termination from the company.
401k plans typically offer a schedule of investments that is fairly limited. Diversification is often compromised by having to elect from a few mutual funds per investment style (Large Cap, Mid Cap), etc. Most 401k plans lack options for investing in alternative strategies, such as hedge fund mutual funds, sector specific funds, and commodities. Many brokerage accounts offer “open architecture”, which means your investment options may tend to be less limited.
Most 401k investment options are actively managed mutual funds. Studies have shown that very few active managers consistently outperform their benchmarks over long time periods. A penny wise investor may wish to consider ETF’s, or Exchange Traded Funds, which provide exposure to passively managed or indexed strategies, generally at a lower cost.
For those folks employed in financial services, several of the large financial firms offer their own company’s mutual funds as investment options. Coincidentally, many offer in-house investmentl advice to their employees for free. Not surprisingly, the free advice is predominantly to direct your money into the company’s proprietary funds. This format allows the company to reclaim some of its wages paid to employees by encouraging them to invest back into fund vehicles whose management fees are funneled right back into the employer’s wallet.
Parking money in an old employer’s 401k plan is painfully inefficient; however, the process of transferring money out of the plan is as fun as a root canal. For example, the blend of salary contributions and company matching contributions create a mix of qualified and non-qualified monies. This can create questions about which type of account the balances should be rolled into. With proper organisation, the agony can be minimized.
If you choose to stay parked, you should conduct a thorough review of the company’s Summary Plan Description, or SPD, on an annual basis. The SPD contains vital information about vesting, beneficiaries, withdrawal rights, and most importantly, disclosure of fees.