This post also appears in Forbes. Reprinted with permission.
We are a work force on the move. Job change is so common, we’re typically jolted when we hear someone has stayed with one employer for their entire career. Whether it is a voluntary move to a new and better opportunity, or the result of a layoff, moving on is part of the 21st century economy.
Yet amid the career moves you have made-or will make in the future-there is an odd counterweight at play as well: Workers tend to keep their 401k plan at an old employer when they leave the job. You leave, but your money stays put. Cerulli Associates estimated in a 2011 study that there is nearly $250 billion in retirement accounts left behind by former employees.
The Cost of 401k Laziness
If you happen to work for a small or midsize employer, chances are that staying put can be a costly mistake. A recent study for the mutual fund trade association documented that participants in smaller plans typically pay annual fees that are 1 percent or more than what folks in the big plans pay. And those big plans were on average still paying more than what any investor could achieve with a portfolio of low-cost exchange traded funds (ETFs) and mutual funds.
By leaving your money put, you could be leaving a whole lot of money on the table come retirement time.
Let’s say you are 40 years old, and have an old 401k from a prior job with $150,000 in assets. That plan charges 1.5 percent a year in annual expenses. Fast forward 30 years. Assuming the money grew at an annualized 6 percent, once we factor in the 1.5 percent annual fee (this is invisible to you—it is subtracted from a fund’s gross return before your account is credited with any gain or loss) your account would be worth more than $560,000 at age 70.
Not bad, you think.
Not so fast. You could do so much better. Let’s instead assume your $150,000 is invested in funds that shave off just 0.50 percent a year, so your net annualized gain is 5.5 percent. That will turn today’s $150,000 into nearly $750,000 over the next 30 years. Simply by reducing your investing costs you could potentially increase your retirement savings by nearly $200,000. Not by taking more investment risk, but by moving your old 401k into what is known as an IRA Rollover account.
While you must keep your money with an employer’s plan when you’re drawing a paycheck from that business, the minute you leave, no matter your age, you are allowed to do a rollover. Not sure if your old 401k plan is expensive? Personal Capital’s free 401k Fee Analyzer will tell you whether making a move could give you a smart fee advantage.
Take the Direct Route to More Retirement Security
Dreading the paperwork to make the move? Granted, it’s going to take a little bit of effort-though not much-and let’s review what the potential payoff could be: six figures. I know your time is valuable, but that seems like a pretty good payoff for what might be a total of one hour’s work, max.
Rolling over your 401k into an IRA is not really all that complicated. The key step is to make sure you do what is known as a direct rollover. This means the money gets zapped directly from your old 401k to the brokerage account or fund family where you plan to move your money. Fail to do a direct rollover and you could run into a nasty tax bill. The company where you will be moving your money will have the paperwork you need to fill out-just check the direct rollover option-and you’re good to go.
Once the money is transferred to your new account, you or your advisor, can choose from thousands of ETFs, funds, or individual stocks and bonds You’re no longer stuck with just the dozen or so funds typically offered within a 401k. My advice is to focus on low-cost options. It’s as close as you can get to a free lunch. By choosing low-cost investments for your new IRA rollover you are giving your retirement security a huge boost, without having to ramp up your savings or your portfolio’s risk.