What should I do with my 401k from my previous employer?

Well, let me start this article by eliminating the most popular choice.  You should not leave it with your old employer. Sorry to do it to you, but you’re going to have to bite the bullet and talk about moving your money.

Outside of a few specific circumstances for a small subset of the population, leaving your money with your old employer could cost you.  The one thing I have found in financial planning that costs people the largest portion of their wealth over their lifetime, is not the wrong investment strategy, not a high commission broker, not overpaying for products and services, nor is it any of the other myriad of issues that crop up when dealing with the subject of money.

The biggest detriment to people’s wealth that I have found is inaction.  People become comfortable with what they have, and the mind is designed for defense.  That means not considering other options or strategies.

401k plans are a great way to encourage Americans to save for their retirement, but also come with some problems.  Choosing a 401k plan gets a match and an automatic salary deferral; they are generally a good way to go.  However, high fees and a lack of true diversification make them a less desirable place to let your money grow once you leave the company, there are just better options.

Company sponsored plans, 401ks specifically, are expensive to administer.  You must have a fiduciary, a plan 3(16) administrator, a 3(21) named fiduciary, a 3(38)-investment manager, payroll and accounting and several other administrative factors that increase costs.  All those third parties need to get paid.  Then you add in the fees on the investments themselves, and that rapidly add up and degrade the performance of a portfolio.

The lowest net fee-to-participant I have encountered in this space is around 1.3% total.  The average fee that I see being taken out of a 401k account is over 2%, and can get obnoxiously high.

Let’s say you went to work for a large aircraft manufacturing company in the great northwest after trade school, you started at age 20, and you worked there until you were 30.  Because you are a saver and that company had a generous match you now have $100,000 In your 401k!

When you turn 30 you have the skills and connections to start your own consulting business.  You leave your company, but now, between the new business and a new baby that insists 2am is rock and roll time, you are a little busy.  You get a statement from your old 401k once a quarter, and just the thought of dealing with it rapidly moves down the priority list.  You let your $100,000 sit for 35years until you remember about it.

The good news; in that 35 years at 8% interest your $100,000 grew to almost $739,000!

But, unfortunately, your first company’s 401k had a net 2% fee.

Had you moved that money to an outside manager with a 1% total fee your retirement bucket would be almost $1,070,000….a difference of just about $300,000.

Can you think of anything you would rather do with $300,000 than pay it to 401k plan administrators and high fee mutual funds?

Beyond the high fees associated with 401ks there are other considerations.  Investment strategies for a 20 something are very different from the planning that goes on for a 55 year old.  There are current and future tax considerations, market loss diversification, insurance and legacy considerations, and a host of other issues that 401k plan managers are ill-prepared to deal with.

Even rolling your 401k into a personal IRA, with low fee and broadly diversified investments, could potentially yield much greater returns.  This would take some familiarity with investing and probably some advice but isn’t as daunting a task as some might think.

Everybody has busy lives.  Between work, kids, and the daily grind, these are the types of things that get left because they are a hassle.  The market goes up, your account statement is higher than you remember, so you are happy.  But behind the scenes your long-term happiness is being eroded, and the only people who gain are Wall Street fund managers and administrators that don’t need a piece of your pie.