Should I Roll My IRA into My New Job's 401k?

Here's a question a CNN Money reader asked:

I'm 59, and I just got a new job. Should I move my IRA to the 401(k) plan or keep it separate?

Here's their response:

Are the fees lower in your 401(k) than in your IRA? Would you like all your retirement dollars in one pot? Do you prefer your 401(k)'s investment options?

If the answers are yes, yes, and yes, a roll-in could make sense, says Kevin O'Fee, a defined-contribution management executive at Fidelity.

Here's what my response would have been:

No.

Is that it? Just "no"? Yep. Just "no."

Why would I say that? Because I know, for the vast majority of people:

• The fees are NOT lower in your 401(k) than in your IRA.
• You would NOT like all your retirement dollars in one pot (especially if that has a connection to your employer).
• You do NOT (or at least should not) prefer your 401(k)'s investment options.

How can I be so sure?

I have yet to run into any 401k where the fees are lower (they are usually MUCH higher) and the investment options are better than a simple Vanguard IRA. Plus, you have total control of your own destiny with Vanguard, something you do not have in a 401k.

I have NEVER moved an IRA into a 401k. In addition, every time I have changed jobs I have ALWAYS rolled my 401k over into a Vanguard IRA. I don't see any way a situation would arise where I'd go with a company 401k over Vanguard, but I guess it could happen. Just doesn't seem very likely.

How about you? Would you advise differently?

Comments

[Matt]

I am not sure how the rules apply or if it is true but I have read you can tap your 401k money before 59 1/2 with out penalty (probably very specific rules) while with an IRA you will need to pay the 10% penalty before 59 1/2.

Seeing that he is 59 this is moot.

However if you are planning on retiring early and prior to 59 1/2 you might want to check out this rule to see if you want to keep a portion of your portfolio with your 401k.

Other than that I agree with everything you have said.

[Strick]

I agree FMF. If your IRA is worse than your 401k you obviously use the wrong investment company. And Matt, IRA money is even easier to get to than 401k money prior to 59.5, splitting IRA accounts to the right size and then doigng 72t early withdraws will let you get exactly what you want without penalty even earlier than than the 401k (and even while you're still working if you want, which makes it a good semi-retirement support fund for those easing into retirement).

[MattJ]

My 401(k) is with Vanguard, as is my IRA. I still wouldn't roll over my IRA into my 401(k).

It just limits my investment options, as my 401(k) only has a limited selection (though a good one) of Vanguard's funds available.

Also, I could theoretically use Vanguard's brokerage service to buy non-Vanguard investments in my IRA, or even take a part of my IRA out and invest it elsewhere if I wanted. Once it's in the 401(k), those options are no longer available.

[Steve]

There is a scenario where it makes sense to roll a traditional IRA into a 401K. It makes backdoor Roth IRA contributions make sense. If you didn't, you would have to pay taxes on ALL of your traditional IRAs, not just what you are converting to a Roth. By reclassifying your Traditional IRA as a 401K, you avoid this.

[ASR]

401k system needs reform for all the reasons noted in this post.

[Greg]

My previous employer used Vanguard for their 401k and had access to some institutional shares, which have the lower fees of admiral shares but without the minimum. But fund selection was more limited than a Vanguard IRA.

[Paul]

Why would anybody choose to lose the freedom and flexibility of their own IRA handling to the constraints of their employer's 401K?

[Apex]

Steve makes an excellent point. For anyone wanting to do back door Roth conversions, existing money in a deductible IRA simply kills that idea. Rolling the IRA into a 401-k is a great way to open the backdoor Roth conversion back up.

[JeffinWesternWa]

...for average "joe", YES, the simplicity and typically lower costs, (many, many IRA's are in Mutual funds with much higher expenses) make it so. IF the 401K has adequate choices, low admin costs by all means yes. You CAN tap it earlier than an IRA without Rule 72t restrictions. However, IF you have poor investment choices and higher costs, then the answer is to roll the 401K TO the IRA afer employer separation. There is no blanket answer here, but, in my 16 years as a financial planner, most investors/clients knew little of either - thus the 401K, which has some guidance and often toll free help is a simplier more effficient choice.

[CD]

I happen to be fortunate enough to have a 401(k) that's probably in the top 1% of plans - tons of Vanguard institutional funds, plus a brokerage account for $80 a year with access to anything else. It also has a great stable value fund, which is a fantastic alternative for the fixed income portion of a portfolio that lots of people don't have access to.

While the institutional shares are nearly free in terms of expense ratio, the admiral ones are pretty close at this point. Looking at the Vanguard Institutional vs. Admiral for say, the S&P500 index, it's .02% vs .05% - so $300 a year on $1,000,000. Maybe some of the other funds have a larger spread, but it seems like other factors would play a much larger role in deciding where to hold the assets.

[Mark]

I disagree with FMF for lots of reasons. The funds in my plan beat their respective benchmark indices pretty handily. And to top it off, I have mostly the "Institutional" share classes in my plan, which are not available to retail investors unless they typically have $1M or more to invest (although with one of my funds, you can get the cheaper share class with $100K).

Here are the funds I use in my plan and their expense ratios, including the administrative fee part of the expense ratio:

--Parnassus Equity Income (PRILX) .74% - 45% allocation. Beat the S&P 500 stock index handily over the last 10 & 15 year periods, as well as the most recent 1, 3, & 5 year periods (albeit by slimmer margins). And did so with less volatility.

--Templeton Global Bond Insurance Shares .55% - 25% allocation (This version of the fund isn't available to retail investors--it's closest approximation would be TGBAX at .61%). Vanguard didn't even offer a global bond fund like this until recently, and it has a lot less flexibility than this fund does.

--Oppenheimer Developing Markets Inst'l (ODVYX) 1.01% (This fund beats the pants off the Vanguard Emerging Markets Stock Index)- 10% allocation.

--VY Clarion Real Estate Inst'l (IVRIX) .61%. - Beats Vanguar's Real estate fund, but by an admittedly slim margin. 10% allocation

--Perkins Small Cap Value - (JSCOX) .76%. This is my only fund that hasn't beaten the relevant small cap index over a long time period (beat it over the 15 year period, but not the 10 year period).

So I have a blended expense ratio of about .71%, including administrative fees.

So altogether, the 5 funds I use in my plan have returned about 10.45% over the last 10 and 15 year periods. The Vanguard Total Stock Market Index (Institutional Shares) 8.37% for the last 10 years and 5.05% for the last 15....and with a lot more volatility than the fund mix I have.

Add in other considerations such as the fact that I'm a public sector worker, and my plan is a 457, not a 401K. With 457s, you can take out the money without tax penalties any time after separating from your employer, and by no means would it make sense for me to roll over my 457 into Vanguard. (And remember somewhere around 15% to 20% of us are public sector workers...not all have 457 plans, but many do).

I would also say that I have seen 401K plans of friends and acquaintances here in the SF Bay Area and many of them have plans almost as good as mine (solid, actively managed funds, with below average expense ratios that beat their relevant benchmarks).

So, while your answer may be appropriate for the majority of people, I think there are plenty of exceptions.

JeffinWesternWA touched on the real problem--most people are clueless about this stuff and do not take a real interest in learning so that they can make intelligent decisions based on their personal situations.

[FMF]

Mark --

"while your answer may be appropriate for the majority of people, I think there are plenty of exceptions."

There are exceptions to every financial "rule". But if something holds true for 99% of the population, I think it's a pretty good guideline.

And maybe you are Warren Buffett and can significantly outperform the market for years and years, but that's even a smaller amount than 1% in my book.

That said, what you do with your money is up to you, of course. I recommend what I have done and it's worked out pretty good for me. I hope the same is true for you. :)

[Mark]

FMF..

Sorry, but it holds true for more than 1% and the whole, entire point of my post was to show that you're painting with too broad a brush.

I am NOT the next Warren Buffet by any means (Hyperbole not appreciated). And that's also my point. It isn't that difficult to select market beating funds provided they have good long term performance and below average costs, which mine do -- and other people's plans do, too.

Contrary to what you see in the popular media, decent 401K plans with market beating funds with below average expenses ARE out there, and they are not as rare as you and other index fund purists make them out to be.

That said, I'm not knocking index funds. I have those in my plan, too. But the index fund purists are getting a little too rabid, in my opinion.

[Old Limey]

The way I see it an IRA has one big advantage over a 401K.

While I was working my company provided a 401K. The advantage to it was that the company made donations to it along with my own. The disadvantage was that my company used a large insurance company to manage their 401K and there were very few investment choices that I was given, plus I was only allowed to make investment changes 2 or 3 times/year.

When I retired I wasn't allowed to keep the 401K so my only choice was to switch it into an IRA. The beauty of our IRAs is that I can use the money to buy and sell stocks, mutual funds, commodities, corporate bonds, municipal bonds, CDs, ETFs,and probably a lot of other types of investments. I could also trade as frequently as I need with the understanding that some investments impose a short term redemption fee for shares held less than a specified number of days.

The main snag with IRAs is that you have to make mandatory required distributions, which are taxable events, once you reach the age of 70 1/2. All of the major investment companies no doubt have a tool on their website called an MRD calculator that enables you to determine the exact size of your MRD for the current year. You can then sell whatever you need and move the money wherever you like.

[FMF]

Mark --

I'm not sure exactly what you're saying, but here's my experience:

1. Every 401k I've had has had MUCH higher fees and MANY fewer choices than a Vanguard IRA. I've had six different plans in my career ranging from Fortune 100 companies to small $30 million businesses and the above has held true for them all.

2. Assuming a small percentage of the 401ks are better than IRA options (which I believe is true), then only a small percentage of the people that have those funds will (or have the ability) to invest in the sorts of funds you're describing (look at the stats and you'll see what people in 401ks invest in). Of that number, only a small percentage will have the discipline and fortitude to keep investing during up and down periods, stick with the funds for a long period, not shift to other funds, etc. -- all the things required to do well with an investment. Take all these small percentages of small percentages and you end up with a very small percentage who can be successful investing in 401ks as you have suggested.

3. You know that Warren Buffett himself recommends index funds for the vast majority of investors, right?

4. I'm not sure you can use your experience with a 457 and compare it to what works/should be done with a 401k. My advice is for 401ks. I don't have history or experience with 457s.

I do think we can agree on this from what you said above:

"while your answer may be appropriate for the majority of people, I think there are plenty of exceptions."

There are always exceptions to everything financially. But I can't advise based on exceptions. We agree that the advice works for the majority, so now we're just debating if the minority is closer to 1% or 49%. I think one thing, perhaps you think the other. I'm not sure we're going to resolve that.

"JeffinWesternWA touched on the real problem--most people are clueless about this stuff and do not take a real interest in learning so that they can make intelligent decisions based on their personal situations."

I agree. Most people (a majority again) are clueless and will not learn what they need to. It's too hard. Their plans might not be able to even get them there in the first place. They want an easy solution that gives them the most impact for the least work. I believe a simple index fund plan does this.

Finally, all this debate about return rate is really not what's the most important about maximizing investing IMO. The amount you save and the amount of time you save for are much more important in determining whether or not a given person will be able to grow their wealth or not. And they are factors that are much more controllable than producing a return rate that beats the averages.

[Mark]

@Old Limey,

I know someone who retired from Loockeed, but many years after you did. They revamped their 401k plan so that they have the Insitutional Shares of Vanguard Index funds as well as the cheap R5 share classes of many American Funds, so it's a much better plan than when you retired in 1992.

[Mark]

@FMF

#1. I help people out with their 401k plans all the time. I see lots of good to excellent plans with reasonable fees out here in Silicon Valley. This ranges from a non-profit pre school, 6 businesses, 2 different public sector plans, and the local utility company. So my experience out of seeing probably 10 different plans is completely different from yours. There was only 1 plan that was truly crappy, and about a year ago they revamped it to be an all index fund plan...still limited options, but much cheaper expense ratios. Maybe it's the region where I live. Silicon Valley engineers tend to be a lot more savvy about having good plans than people in other professions, and the non-engineers benefit from this.

#2. I question your assumptions. We're both dealing with the problem of small sample size. So it's possible both of our experiences are true.

#3. I don't really care what Warren Buffet recommends. He gives sound byte recommendations to the clueless general public. The data show that people are actually pretty good at picking better than average funds with below average costs. The much larger problem people have is sticking with them.

4. 457s and 403bs operate in most ways the same as 401ks and can pretty much have all the same mutual fund options as 401ks do. The differences with 457s are related to withdrawal rules. From an investing standpoint, they're the same. And 15-20% of us DO work in the public sector, so that's a pretty good chunk of the population. I would say your admission that you don't know much about 457s pretty much carries over to your limited knowledge of 401ks as well. You're basing it way too heavily on your personal experience. There's a lot you don't know, yet you act very know-it-all in this post, which is annoying (and out of character for you).

Bottom line: There are too many exceptions to the rule here for you to be so absolutist in your position. We're not talking like 1% exceptions. We're talking in the 20%-40% range here.

As far as the return rate goes, you can't say that index funds are great because low costs mean they get better returns on the one hand (as you have so many times on this blog), and then say on the other hand that the return rate isn't that important. You're talking out of both sides of your mouth there.

[FMF]

Mark --

We're going to have to agree to disagree.

Contrary to what you might think, I do like other points of view. If you like, I'd love to have you write a Millionaire Interview (MI) giving more details on your techniques. It should be interesting. I think you've done a Reader Profile, but don't recall you having done a MI.

As for "talking out both sides of my mouth" (a derogatory statement which seems out of character for you), I do think index funds are good because they are easy and do offer good returns. You can see my thoughts on them here:

http://www.freemoneyfinance.com/2013/08/why-i-invest-with-index-funds.html

Here's the last paragraph of that post:

"All of this said, we're really discussing an issue that's not the most vital to investment performance -- return rate. Sure, it's important enough, but when it comes down to it, time and the amount invested are MUCH more important to growing your wealth over time than return rate. That's why I try to get a "good" return (I don't need to take the added risk to try and get a "great" return) -- which index funds can certainly deliver -- but mostly focus on saving/investing as much as I can as soon as I can. I can control these latter factors much more than I can return rate and since they are more important, this is where I focus my efforts. Over time, doing this will yield tremendous results."

If you want more details on how time saved is more important than return rate, see this post:

http://www.freemoneyfinance.com/2013/11/the-best-way-to-maximize-your-investment-return.html

[Josh]

There is one big exception...

https://www.tsp.gov/investmentfunds/fundsoverview/expenseRatio.shtml

[Mark]

Yes, we will most definitely disagree. What I disliked most about your post was the absolutist tone. Despite paying lip service to being open to different ideas, you definitely did NOT make it sound like you were open to different ideas when you say / imply that 401k/457 plans like mine were a 1% exception.

I'm not up to Millionaire Status yet, but I am about 1/3 of the way there. Not bad for someone 43 with a modest income in a high cost area. (And do I detect a bit of snarkiness in that comment?)

Sorry if you don't like me calling you on talking out of both sides of your mouth. But I think you're being uncharacteristically hard headed and I'm calling you out on it.

[Mark]

And BTW, I've ALREADY shared my "technique" as far as doing well as far as investments go, in my original post and follow up comments back in 2011 as well as in my comments above. Bottom line is my "technique" IS NOT THAT DIFFICULT!!

Here are several balanced funds that have beaten the S&P 500 stock index over the last 20 years with less volatility:

Vanguard Wellington
Mairs & Power Balanced
T. Rowe Price Capital Appreciation
Oakmark Equity & Income (not quite 20 years old yet)
Dodge & Cox Balanced

This fund is worth it if you can get it in your 401k without paying the load:

Invesco Equity & Income

Here are some "runner up" funds that didn't quite beat the S&P 500 stock index over 20 years, but came close, and had less risk/volatility:

Fidelity Balanced
Vanguard STAR
T. Rowe Price Balanced

Here are some runner up load funds that are good if you can get them in your 401k to avoid the load:

American Funds Income Fund of America
American Funds Capital Income Builder
American Funds Global Balanced
American Funds American Balanced
American Funds Global Balanced

I'm sure there are others I'm missing, but these are the ones I know of off the top of my head.

[Mark]

Oh, and one more top notch no-load fund I forgot to mention is:

FPA Crescent.

Personally, I wouldn't invest in it because its expense ratio of 1.14% is simply too high for a fund with $17.5 Billion in assets. But it has the second highest 20 year performance on the list at 10.88% (after T. Rowe Price Capital Appreciation's 11.08%). If it had the same expense ratio of T. Rowe Price Capital Appreciation, it would have beaten it by about .20%, which adds up over 20 years.

[FMF]

Mark --

No, no snarkiness at all. From your posts it seemed liked you had been investing a good amount and getting great returns for a long time. I assumed you were at least at $1 million and I need/want more MIs.

[Jon]

When I worked for a wealth planning firm we were trying to get into managing small business 401ks. I went to a few courses on how to find the fees, including the hidden fees these 401k plans charge. I was floored when I saw that some were costing employees 3% easily. That is just wrong. I would never move my IRA into a 401k plan for that reason alone.

[LTW]

Is it not a little bit amusing to anyone else that Mark bases everything on past performance? In your experience is that a good indicator of future performance Mark? Sure, several of your funds have beaten the index over different periods but that also means they are less likely to do so in the future. Keep that in mind.

[LTW]

Also, it isn't appropriate to compare a fund such as Oakmark Equity and Income fund directly to the S&P 500. The S&P fund is all large cap equities while I assume the equity and income fund has some mixture of stocks (small, medium and large cap) as well as fixed income (bonds, maybe REITs, idk. Especially when you then claim it has less volatility. Of course it does, it isn't all stocks.

I haven't seen FMF advocate for 100% equity allocation here (and all large caps at that) so why is this your argument?

[Mark]

@FMF...Actually, I didn't really start getting good returns until I took a balanced approach. I find a mix of stocks and bonds works well for me. And the research from Morningstar pretty much finds the same thing....that most people can't tolerate the risk of an all stock portfolio and that they actually get better returns with a balanced portfolio (60-70% stocks & 30-40% bonds/cash). I have done a back of the hand calculation that if I'd just invested in a good balanced fund like one of the ones I listed (a few of which were available to me in my 457 when I started working), my net worth would be at least 50K higher, and maybe even 100K higher today.

@LTW...Yes, I think for some funds past performance is a pretty good predictor. Some of the funds I listed have been around for more than 20 years, and you can take a look at their returns on the chart section of Morningstar.com. And you'll find that their performance is consistently above average decade after decade. Part of that is below average costs. And part is consistent management practices. You can't say that they are less likely to do well in the future any more than you can say they are more likely. All we can say is we don't know the future.

As far as not comparing Oakmark Equity & Income (or any balanced fund) to the S&P 500....why not? Over long periods of time a 100% equity portfolio should beat one that mixes in bonds. I think if a balanced fund beats the S&P 500 over a 20 year period, that says something positive about the fund. So beating the S&P 500 with less volatility IS a big deal. Few stock funds can pull that off. So when a balanced fund does it over 20 years, the odds are they're doing something right.

If you want, I could compare them to the Instiutional Shares of Vanguard Balanced Index (60% total stock market index plus 40% bonds). If I had done that, the list of good balanced funds would have been much longer than what I listed.

[Old Limey]

@Mark
Actually by moving my Lockheed 401K into an IRA at Fidelity when I retired on 9/1992 things worked out very well for me. The reason being that there was no restriction at all on the funds that I could buy so that when the dot.com bubble started I was able to find the hi-tech mutual funds that were starting good uptrends and ride them up until the bubble burst when I sold everything I had over a 4 trading day period. I then went into some junk bond mutual funds until everything had settled down a few years later.

[LTW]

@Mark

There is a reason funds are required to put the statement "past returns are not indicative of future results" everywhere. It's because they can be (and have been) a poor indicator of future results although I do agree that no one knows for sure how fund X or Y will do in the future. I believe you will find this out if you hold the same funds you have forever.

As to comparing balanced funds to the S&P 500, I thought I made that point pretty clear. You are comparing apples to oranges. Especially using your timeline which coincides with a 20 year bond bull market and picks up two major equity crashes (.com and recent financial crisis).

Bonds don't appear that they will do much in the coming years with rising interest rates but I don't try to time the market. Personally, look at all my holdings as one portfolio (401ks, taxable, ROTH IRA's, etc.) and set my allocation based on my age and risk preference.

[FMF]

I completely agree:

"past returns are not indicative of future results"

Studies will show that this year's winners will be next year's losers. And if not next year's losers, then the year after that or the year after that. It's hard to always be great (or even good) which is why most professional fund managers, with all their money, resources, people, etc. still can't consistently beat index funds.