Why You Should Roll Your Old 401k Over To Vanguard
I finally took the initiative to roll over my old 401k to a Vanguard IRA this weekend. It was something I should have done as soon as I was laid off, but I seemingly had more important things on my mind. They say inertia is the biggest hurdle to getting your finances in order, and I believe it. Even though I like to think of myself as pretty on-the-ball when it comes to this investing thing, getting around to doing something as simple as rolling over an old 401k still took far longer than it should. Thankfully, the process couldn’t be simpler thanks to Vanguard’s customer service.
Why Should You Roll Your 401k Over To An IRA?
Sure, you could just leave your money in your old 401k plan, but there are several reasons why you should roll your old 401k into an IRA with a top-notch mutual fund company such as Vanguard, Fidelity, or T Rowe Price.
- To consolidate your finances - Having all of your retirement money at one financial institution makes keeping track of your finances much easier. And don’t worry, your investments are held in trust for your benefit at your broker and are protected by the Securities Investor Protection Corporation (SIPC), which is basically the FDIC of the investment world. Even if your chosen financial institution goes bankrupt, you’re protected.
- Better investment options- Let’s face it, most 401k plans suck. They’re stuffed with expensive, subpar investment options. In my case, I had access to decent large-cap and mid-cap index funds (though still much more expensive than Vanguard), but no small-cap or foreign funds with an expense ratio of less than 1.15%. In that situation I’d have to be very lucky indeed not to trail the market by a substantial margin. Rolling over to Vanguard and putting my money to work in a portfolio of index funds with razor-thin expense ratios improves my odds dramatically.
- Better diversification - Just as with number 2, most 401k plans cover the large-cap, small-cap, international, and bond asset classes, but not much else. Want to own commodities? Real estate? You’re probably out of luck. In an IRA, however, you can own pretty much anything you want.
The Process
The process itself couldn’t be easier. Vanguard has a form on their website that walks you through the entire process in the form of a questionnaire. Simply answer the questions and Vanguard will generate a form for you to print out and mail into them. Then, Vanguard gets in touch with the financial institution holding your old 401k and initiates the transfer for you. You literally don’t have to do a thing. The whole process takes about 6 weeks to complete but again, Vanguard takes care of all the details.
Important: Never ever ever ever have the financial institution holding your 401k write a check directly to you. Always have a 3rd-party financial institution like Vanguard initiate and handle this process for you. If you botch the transfer or don’t deposit the money into a new account within the specified period of time, the IRS will count that as an early withdrawal and assess a 10% penalty in addition to the taxes you will have to pay on the withdrawal.
While I generally agree, and in fact have rolled over a few 401ks to IRAs myself, I do think there are some advantages for 401ks that might apply to some investors. Investment flexibility and control are the major advantages of IRAs.
By staying in a 401k; however, you may be able to borrow from your account, withdraw prior to 59.5 without penalty for certain hardships, and participate in funds that may waive loads for 401k investments.
Generally, I vote for IRAs as well. I just wanted to point out the flip side in certain situations.