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What Should I Do with My Old 401k?

401K RetirementIt’s Only 0.90%…..

401(k)’s are a great benefit for employees of corporations.  The big reason is the company match that employees receive on contributions that they make into the plan.  But what happens when you leave the company and the company match is no longer happening?

If you’re in this situation, you may be asking, “What should I do with my old 401k?”

Instead of being a benefit to your future retirement that old 401(k) now becomes a liability for one big reason – high fees.  The average 401(k) provider charges an average of 1.4% to administer the plan and you can tack on an extra 0.75% in fees for the average mutual fund found within the plan for a total of 2.15% in total costs.

Compare this to rolling this over to an IRA.  There are many do-it-yourself options out there and it’s now easy to construct a well-diversified portfolio of ETF’s that only charge 0.25%.  If you want investment management advice as well as the ability to talk to a financial advisor about other topics, add an additional 1.0% to manage and rebalance the portfolio for a total of 1.25%.

So, you can leave that old 401(k) on autopilot and pay 2.15% in fees each year or move it to a professional advisor and pay 1.25% in fees.  You might say, a 0.90% difference in fees doesn’t sound like a whole lot, so why bother?

Let’s illustrate why with a couple of examples.  Let’s assume you’re 40 years old and have $100,000 stashed in your 401(k).  You and another co-worker (we’ll call her Abby) have just left your corporate employer to partner on a new business.  For this example, we’ll also assume Abby has $100,000 in her 401(k) and is also 40 years old.

Let’s also conservatively assume that you both can earn an 8% annual return and will live both live to age 90.

You dive head first into your business and do not make time to roll that 401(k) over, so your “after-fee” returns over the next 50 years are 5.85%.  Abby on the other hand, immediately rolls her plan over which results in an “after-fee” return of 6.75%.

The 50-Year Impact – It’s “Only” $981,000!

Let’s look at the impact of that simple choice over the next 50 years (big data table alert!):

401(k) vs. Rollover Comparison
Your “After-Fee” Return = 5.85%
Abby’s “After-Fee” Return = 6.75%
AGE STARTING BALANCE (YOU) INVESTMENT RETURN (YOU) ENDING BALANCE (YOU)   STARTING BALANCE (ABBY) INVESTMENT RETURN (ABBY) ENDING BALANCE (ABBY)
              40 $100,000 $5,850 $105,850 $100,000 $6,750 $106,750
              41 $105,850 $6,192 $112,042 $106,750 $7,206 $113,956
              42 $112,042 $6,554 $118,597 $113,956 $7,692 $121,648
              43 $118,597 $6,938 $125,535 $121,648 $8,211 $129,859
              44 $125,535 $7,344 $132,878 $129,859 $8,765 $138,624
              45 $132,878 $7,773 $140,652 $138,624 $9,357 $147,981
              46 $140,652 $8,228 $148,880 $147,981 $9,989 $157,970
              47 $148,880 $8,709 $157,589 $157,970 $10,663 $168,633
              48 $157,589 $9,219 $166,808 $168,633 $11,383 $180,016
              49 $166,808 $9,758 $176,567 $180,016 $12,151 $192,167
              50 $176,567 $10,329 $186,896 $192,167 $12,971 $205,138
              51 $186,896 $10,933 $197,829 $205,138 $13,847 $218,985
              52 $197,829 $11,573 $209,402 $218,985 $14,781 $233,767
              53 $209,402 $12,250 $221,652 $233,767 $15,779 $249,546
              54 $221,652 $12,967 $234,619 $249,546 $16,844 $266,390
              55 $234,619 $13,725 $248,344 $266,390 $17,981 $284,372
              56 $248,344 $14,528 $262,872 $284,372 $19,195 $303,567
              57 $262,872 $15,378 $278,250 $303,567 $20,491 $324,057
              58 $278,250 $16,278 $294,528 $324,057 $21,874 $345,931
              59 $294,528 $17,230 $311,758 $345,931 $23,350 $369,282
              60 $311,758 $18,238 $329,996 $369,282 $24,927 $394,208
              61 $329,996 $19,305 $349,300 $394,208 $26,609 $420,817
              62 $349,300 $20,434 $369,734 $420,817 $28,405 $449,222
              63 $369,734 $21,629 $391,364 $449,222 $30,323 $479,545
              64 $391,364 $22,895 $414,259 $479,545 $32,369 $511,914
              65 $414,259 $24,234 $438,493 $511,914 $34,554 $546,468
              66 $438,493 $25,652 $464,145 $546,468 $36,887 $583,355
              67 $464,145 $27,152 $491,297 $583,355 $39,376 $622,731
              68 $491,297 $28,741 $520,038 $622,731 $42,034 $664,766
              69 $520,038 $30,422 $550,460 $664,766 $44,872 $709,637
              70 $550,460 $32,202 $582,662 $709,637 $47,901 $757,538
              71 $582,662 $34,086 $616,748 $757,538 $51,134 $808,672
              72 $616,748 $36,080 $652,828 $808,672 $54,585 $863,257
              73 $652,828 $38,190 $691,018 $863,257 $58,270 $921,527
              74 $691,018 $40,425 $731,442 $921,527 $62,203 $983,730
              75 $731,442 $42,789 $774,232 $983,730 $66,402 $1,050,132
              76 $774,232 $45,293 $819,524 $1,050,132 $70,884 $1,121,016
              77 $819,524 $47,942 $867,467 $1,121,016 $75,669 $1,196,684
              78 $867,467 $50,747 $918,213 $1,196,684 $80,776 $1,277,460
              79 $918,213 $53,715 $971,929 $1,277,460 $86,229 $1,363,689
              80 $971,929 $56,858 $1,028,787 $1,363,689 $92,049 $1,455,738
              81 $1,028,787 $60,184 $1,088,971 $1,455,738 $98,262 $1,554,000
              82 $1,088,971 $63,705 $1,152,676 $1,554,000 $104,895 $1,658,895
              83 $1,152,676 $67,432 $1,220,107 $1,658,895 $111,975 $1,770,871
              84 $1,220,107 $71,376 $1,291,483 $1,770,871 $119,534 $1,890,405
              85 $1,291,483 $75,552 $1,367,035 $1,890,405 $127,602 $2,018,007
              86 $1,367,035 $79,972 $1,447,007 $2,018,007 $136,215 $2,154,222
              87 $1,447,007 $84,650 $1,531,657 $2,154,222 $145,410 $2,299,632
              88 $1,531,657 $89,602 $1,621,258 $2,299,632 $155,225 $2,454,858
              89 $1,621,258 $94,844 $1,716,102 $2,454,858 $165,703 $2,620,560
              90 $1,716,102 $100,392 $1,816,494 $2,620,560 $176,888 $2,797,448

At the end of the 50 years, you’ll have $1,816,494 and Abby will have piled up $2,797,448.  Both of you will have done very well, but Abby will have an extra $981,000 in the bank all based on reducing her costs of investing by a paltry 0.90%.

Your Assignment

Are you asking yourself, “What should I do with my old 401k?  It may never seem urgent to get it rolled over to a lower cost option; however, if someone said that you could spend a few hours of effort and be handed close to an extra $1 million over the next 50 years, wouldn’t you do it?

Find a financial advisor who offers low cost investing options, roll that plan over and put that extra million in your pocket!

2 Comments

  1. Miguel on September 28, 2016 at 1:46 am

    Awesome Dave! Very thorough and practical. Dave I’m a 59 year old Latino with Zero knowledge on finances. However, I’m a retired Social Worker from City and County of San Francisco, CA., and am enjoying my retirement pension from Employee’s Retirement System of $3,160 per month. Believe it or not, our (wife and I) current expenses are about $1000 as we moved to Rosarito Beach, BC Mexico. So, in short, I’d like to start investing and want to learn more about that. First of all, do you think I should keep my current retirement or roll it into an IRA? Or should I invest my current earnings for a better profit? I have no children to support and have some cash money set aside for emergencies.



    • Dave Rowan on September 28, 2016 at 9:00 pm

      Hi Miguel – thanks for your kind words on my article! Your financial situation sounds like it’s shaping up nicely in retirement with an income that is more than triple your expenses. Nicely done! Here’s what I’d suggest – 1.) Call your former employer to see if it’s even an option to rollover your pension. It is likely a defined benefit plan and in general, it is not possible to roll it over once you start receiving benefits 2.) It probably is a good idea to invest some of your excess cash, but I’d need to know more about your situation, time frames and attitudes on investing. Feel free to visit my website and set up a Get Acquainted Call and we can discuss your options!