Save Your 401k, Get a Lower Expense Ratio

Do you have a 401k you left behind at an old job? A new report from Capitalize estimates that there are around 24 million orphaned 401k accounts with combined assets of nearly $1.3 trillion. 

That’s a whole lot of money that may not be earning as much as it could.  

You’ve listened to me make a big deal about the annual expense ratio charged by mutual funds and exchange traded funds (ETFs). The difference between a low expense ratio of 0.10% and a higher charge of say 0.70% can mean tens of thousands of dollars over decades of retirement saving. 

So the question you need to ask yourself is if you left money in a 401k at an old employer, are you paying more than you need to? 

I want you to check in with your orphaned 401k and find out the annual expense ratio you are paying for every fund you own. If you are paying more than 0.10% for a U.S. stock index fund and more than 0.10% for a core bond fund, I am here to tell you that you can do better. 

Option 1: A 401k to IRA direct rollover. 

Everyone who saves in a 401k and then leaves their job is allowed to move their retirement account to an Individual Retirement Account (IRA) at a brokerage, such as Fidelity, Schwab, TD Ameritrade, or Vanguard. These brokerages offer index mutual funds or ETFs that charge less than 0.10%.  

When you move money out of your old workplace plan it is called a 401k rollover. The brokerage will help you with the paperwork to make the move. The most important step in a rollover is to instruct the 401k plan to send the money directly to the brokerage account where you have opened an IRA account. This is called a trustee-to-trustee, or direct rollover. If you do this there is no tax bill when you move your money.  

Once the transfer is made you can invest it in the super low-cost index mutual funds and ETFs available at the brokerage. 

Option 2: Move your old 401k to your new employer’s plan. 

Some 401k’s allow you to move money from your old 401k into your new 401k. Again, check what the expense ratio charges are for the funds in your new workplace plan. If they are rock-bottom low, then you can move your old account into that. If not, you can do the 401k-to-IRA rollover instead.