Appearances

This Morning’s Money 911

Posted by Jean

You asked, we answered! Today on NBC, the Money 911 panel discussed everything from home renovations to 401(k)s — watch the video below to learn more!

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Shortly after finishing this morning’s Money 911, I checked in with my colleague Michael Falcon.  He’s responsible for much of the work that has gone into this site — and as well as the Debt Diet Online and many of the other projects I’m involved in.  But he also spent years working in the retirement industry, most recently running the retirement business at Merrill Lynch.  He had a bone to pick with one of the answers — and he has a very valid point.  Here’s what he had to say.

I’ve gotta disagree with you and David Bach on the 401(k) rollover question this morning.  If she was with a large or even mid-sized accounting firm, that advice could be costing her over 1.0% per year in fees.  The question is not so much “Who is your plan provider?” but more importantly, “How large is your plan and what is the cost?”.  She can get information on her plan costs and how they stack up against other plans at www.BrightScope.com – and can even compare it to an on line, low cost IRA.  If she has more than $5,000 and less than $100,000 in the 401(k) (I’m assuming she does since she is 25 and was with a professional services firm) and there are more than 500 -1,000 participants in the plan, then I would guess that keeping the money in the plan might be the best option.  She can always roll it directly into her new plan when she gets her next job.

A few points:

In a retail IRA she is likely to be sold B or C fund shares and this can be relatively expensive — especially if she sells them to transfer money back into a (k) plan at a future employer in a few months.  If she is in a plan that is large enough (over $1 to 3 million or 500 employees), she can be invested in A, R or I share classes with cost savings from 0.1% to 2.0% or more vs. B and C shares (depending on when she might sell).  

While IRA’s offer the full universe of investments and her plan menu might not, I doubt that she needs all these choices.  1 or 2 diversified stock funds should do the trick.

While over the course of a career not rolling-over can lead to unnecessary accounts and administrative complexity, she is 25 and likely only has this account and maybe one other?

In the past, it was common for employers to hit former employees with charges to stay in the plan.  If this is the case in her plan, I would agree — get out.  But many if not most plans now encourage (or are at least neutral) to staying in the plan.  

Again, for a 25 year old who will likely and hopefully find that next job soon, this is a relatively minor and financially insignificant issue — the great thing is that she is rolling over or staying in the plan and not cashing out like so many others.  That said, many older people are in this same boat and the automatic assumption (and pressure) is to rollover when you leave or even retire.  For many workers, this is not the right answer.

…. and you know I usually agree with both you AND David…  ;-)