An Ode to My Old 401(k)

When leaving a job, there are a few actions one can take with their old 401(k):

  1. Do nothing and leave it where it is, paying any fees your employer charges you now that you’re no longer with them
  2. Withdraw the entire balance, paying a 10% penalty and regular income taxes (ew, this would cost me about $40,000) based on the current balance
  3. Roll it over into the new employer’s 401(k) plan
  4. Roll it into an IRA

I definitely don’t want to withdraw the balance with how much that would cost in taxes and the fact that I would then lose the tax-deferral on my ~$100,000 for another 34+ years! I also don’t want to roll it into an IRA as then I would lose my ability to do a Backdoor Roth IRA. So there rules out half of my options!

The choice between the other two options depend on what the options look like in the new 401(k) compared to my existing one. My employer will charge a small quarterly fee that basically equates to a ~0.04% additional fee with my balance, which is actually a decent chunk considering that the funds in the new plan are cheaper than the equivalent funds in my old one.

When I first started investing, I posted a portfolio review on the Bogleheads forum and got some helpful feedback. Since then, I haven’t requested any feedback from them, but I still use their format to do a periodic review of my investments. I find it’s a great way to take an overall look at my portfolio. I follow the format right down to the questions asked. Here is the questions I asked myself this time around as I was figuring out what to do with my old employer’s 401(k):

  1. My old 401(k) will start to charge a quarterly fee at some point (turns out this kicked in last week) that equates to about 0.04% annually of my current balance. I don’t want to roll my old 401(k) to an IRA since that would cut off my access to the Backdoor Roth IRA, but should I roll it into my new 401(k) plan? The only catch I can see here is that if I roll the old 401(k) out of the plan, then if I were to return to that employer in the next few years, I would have to start the vesting period over again.
  2. My new 401(k) plan allows me to contribute after-tax in addition to pre-tax. It also allows me to do an In-Plan Roth conversion or I can instead move the money to my Roth IRA. Which is a better option?
  3. The international stock index fund I have access to in my new 401(k) doesn’t include small-caps, but the one in my old employer’s 401(k) does. Is that a deal breaker to me?
  4. I see a few options here:
    a) roll old 401(k) into new 401(k), do in-plan Roth conversions to keep things simple
    b) leave old 401(k) where it is until I don’t need it any more to keep my international stock allocation out of the new 401(k) and then roll it into the new one (move after-tax 401(k) contributions to Roth IRA)
    c) roll old 401(k) into new 401(k), but move after-tax 401(k) contributions to Roth IRA
    d) leave old 401(k) where it is and do in-plan Roth conversions

I then made a huge spreadsheet to compare options A, B, C, and D for question 4. B was much more expensive than A or C due to the fee my old employer will start charging soon, so I didn’t make a spreadsheet for option D at all. C ended up being cheaper than A for the first several years and then eventually A became cheaper, but not by a huge margin either way. This makes it a strong vote in favor of option C.

I’m about two months’ away from Vanguard telling me my 5 year return (it’s the small, psychological things…) and if I roll my old 401(k) out before then, I won’t see that number on Vanguard’s site…

I also decided that since the international stock index fund I have access to in my new employer’s 401(k) plan isn’t as complete as the Vanguard one, I’m going to try to keep as much of my international stock allocation as possible in my taxable and Roth IRA accounts. It’s currently the only fund in my taxable account, so I’ll do some rearranging in my Roth IRA at some point.

This also answers question 2, suggesting that I should move the after-tax money to a Roth IRA instead of doing an In-Plan Roth conversion. I’m going to see about rolling the Roth portion of my old 401(k) into my Roth IRA and otherwise, I’ll wait until early May to roll the pre-tax portion to my new 401(k).

I’ve started investigating how to do the rollover. I called the old 401(k) plan administrator and they said that I can roll the Roth portion into my Roth IRA and the pre-tax portion into my new 401(k), so long as I do it all at once. I can initiate leaving the old plan online and the funds should get to my Roth IRA within 2-3 business days. The new plan required me to request some papers to be mailed to me, which will take 3-5 business days, and then I’ll take a look at things again. The telephone rep from the old plan told me that the new plan will most likely require a check to get mailed to them, which will take about 2 weeks. My boyfriend and I were both pretty amused/confused at how much mailing was involved in this process despite the fact that it is 2015…

Yay for a plan (though still with some details to fill in) on this at last! It was stressing me out quite a bit to be unsure what to do with this, especially since my old 401(k) is worth about $100,000, which is about 55% of my overall investments.

Here’s a graph of my old 401(k) balance over the last ~5 years, as an ode to it. It has been a good 401(k) to me over the last five years and I will miss it. (I also refused to shred my old health insurance card. It’s with my previous health insurance card. Yes, I am a bit of a hoarder…) You can see that I didn’t contribute as much in the first year, but I started maxing it out partway through 2011 and it has grown quite nicely since then!

Ode to my old 401(k) balance

Readers, what do you usually do with your old employer’s retirement plan when you leave?

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25 thoughts on “An Ode to My Old 401(k)

  1. Based on what happened to me with my old employer, just lost half of my employer match after they told me for years I had a certain amount, I will never let an old 401k sit around. To me, the Roth just isn’t worth it. It’s such a small amount of money. I’m also married and my wife can do the backdoor. If my 401k had some decent options, I would stomach that over letting something sit idle.

    Also, I’m firm believer that a taxable account has great power if you know what you are doing and have the proper plan. http://moiandmoney.com/?p=502

    • Ugh, that’s not cool! The Roth may seem like a small amount of money, but it grows quite well and I feel like it’s worth sticking with. That might have been a different story if my new 401(k) had terrible options. I’m assuming you still max out your 401(k) even though the options suck?

      Oh I’m definitely a firm believer in the taxable account. I’m just paying off the mortgage first.

  2. I’m in a similar boat.. changed jobs a year ago… I still have my old 401K at my old broker (fidelity).. they haven’t started charging and putting any additional fees on it like I was told would happen.. So I haven’t rushed to get anything out of there. The fees on the funds in those accounts are much less then the fees in my new 401K.. However, I would roll it out to my Roth IRA and open a Traditional IRA to accept the pre-tax investments.

    I don’t feel like it’s leaving anything behind as I have 3 401K’s accounts in fidelity, 1 of which is still actively contributed to with a part time employer that offers a match as well.

    I’ve so far chosen the easy road leaving it where it is… But I think at some point consolidating all over to Vanguard will be the way to go and get all of those funds in one broker. not to mention getting to the price point break on transactions at Vanguard with having $500K in assets would be nice for doing so more trading and having low transaction costs.

    Great break down.. and I like your point #1… If you every go back to your old employer if you leave that 401K there is will reactivate and pick up where you left off… I have had those same thoughts since I would put a greater than 50% likely hood of that happening if I wanted to go down the road again.

    cheers!!
    Tim

    • I definitely plan to consolidate at Vanguard when I no longer care about the Backdoor Roth IRA. I’m half tempted to give it a few months at the new job before I roll my old 401(k) away, but then another part of me says that I’d most likely find an all-new job if I were to leave this one. So who knows. I wouldn’t care if it wasn’t a three year vesting period at my old company and I’ve already satisfied that!

      That’s great that you haven’t seen any fees yet!

  3. Ug. This is on my to-do list. I still have left it sitting there. The fee is very small, but I think it is most advantageous to move it into my current plan. Thanks for the reminder to actually take care of this this year.

    I have this weird fear of all that money will end up being out of the market on the best day in stock market history, which means it could affect my total return in a not-tiny way. I’m absurd. I just need to take care of this.

    • You concern about missing time in the market during the transition time I think is valid.. However, being the market is so high right now likely not that much concern for missing out on a BIG day; but we have had some rather volatile days lately.. I think I would try to time it with a few week period where earnings and other things are less likely to cause fluctuations.

    • I definitely have that fear too! Especially since this is 55% of my investments and about $100k…that is a decent chunk to have out of the market for the 2-3 weeks this check will apparently take to go between plans!

  4. FYI on small caps – effect is pretty much nonexistent without first controlling for quality. Recent Asness paper talked about how real it is once you stick in additional filter like quality- but data on small cap without some quality filter being advantageous is quite poor. The logic on this is actually quite interesting.
    https://www.aqr.com/cliffs-perspective/the-small-firm-effect-is-real-and-its-spectacular
    So unless your old one had a factor (like value or quality) that went beyond plain small – you probably aren’t missing anything.

    • That’s exactly what I wanted to hear! I was comparing the funds on Morningstar today and there wasn’t really a noticeable difference between the two, so I think it’ll be fine. The only sticking factor at this point is how likely I think I am to return to my former employer in the next five years…

      • You were so frustrated with your job. Why would you go back? Would they even take you back after you jumped ship?

        • A) They totally would, B) five years is a pretty long time, C) in a large company, every group is different and I could end up in a group where I wouldn’t hate my job. Five years ago, I would have definitely picked the job I did and the new one is the better fit now, but who knows which one would be the better fit five years from now. It would cost me somewhere around $200 in fees to keep the account open for the next five years and not have to wait for the multi-year vesting period to happen again if I did go back – then I could stay for six to twelve months and still get all of the matching money, which even one month of matching money is more than the fees for five years.

  5. My 401K at my previous job was actually a Roth 401K (probably not the best tax move in hindsight, given our ER plans now…). So when I left I just rolled it over into my Roth IRA at Vanguard and it was really easy (though it did require mailing multiple forms and checks). I was very glad I did rollover when I did because it was just a few months later that my old employer suddenly folded. Employees had no notice, it was crazy. All their 401Ks were locked and inaccessible for quite some time. Though I had no idea that was coming, I was glad that I had pulled my money out rather than dawdling and getting caught in all of the craziness.

    • Heh. I have some Roth 401(k) funds as well. I decided to max it out my second calendar year working and somehow decided that Roth would be best. I contributed to the Roth portion for a few months before switching to pre-tax, which I’ve stuck with ever since. For simplicity, I kept that account entirely invested in the S&P 500 index fund for the last ~4 years and it’s grown from the ~$4k I contributed to ~$6.5k. Not a bad return for only 4 years!

      Wow, I can’t believe your old employer suddenly folded! I am 99.99999% confident that my old employer would not suddenly fold like that, but I would be rolling over that 401(k) immediately after leaving if it was a smaller company. I’ve also heard horror stories of people changing their names legally after leaving an employer, their former employer folding, and then trying to get their 401(k) money out…

    • That’s a great plan! I wish that wouldn’t cut off my ability to do the backdoor Roth IRA though or I would totally do it.

      • Why do you care about the backdoor roth IRA when you said you have access to the much higher contribution limit Mega Backdoor Roth?

        • Why not do both? I can always roll the old 401(k) back out of the new one – they keep it in a separate Rollover source and the plan rules stipulate that I can roll it back out. So I can roll the money in and then roll it out to an IRA at any time if I so choose. I also don’t have access to the full contribution limit on the Mega Backdoor Roth.

  6. I opted to start a traditional and a Roth Solo/ Individual 401(k) [i401(k) for short] when faced with a similar choice. This affords me several advantages:
    1. It’s a stable approach for any future job changes for me or my wife. Without this, I would have to go through this same decision at every employment change. If one has traditional or Roth IRAs, those can be rolled into these accounts as well to gain consolidation.
    2. As the administrator of the plan, I determine the available investment options. As the plan administrator, I determine the plan rules as well. The plan rules part can get a little tricky though. The shortest path to starting a plan is to go with a pre-defined plan template offered by the major brokerages. If you don’t like the rules in those templates, then you have to go with a custom plan, for which you need to involve a third-party plan designer (a benefits specialist) to draft the plan.
    3. I can characterize income from side hustles as business income, and then take advantage of tax-advantaged space available for employer contributions, above and beyond the employee contribution limits.

    There are several options out there for starting i401(k) plans. I looked at offerings from all of the major brokerage houses. I would have liked to go with Vanguard due to their selection of investments, but they don’t allow incoming rollovers. For me, it came down to choosing between Fidelity and TD Ameritrade. I ended up going with TD Ameritrade because their selection of commission-free funds (both ETFs and mutual funds) better matched what I was looking for than Fidelity’s e.g. TDA provides commission-free access to several Vanguard ETFs; Fidelity offers ETF’s from iShares.

    • That sounds like a great plan! Unfortunately, I have no self-employment income, so I am not eligible to open a Solo/Individual 401(k). My new 401(k) has some great funds though :)

      • The criteria for what constitutes self-employment income is fairly inclusive and permissive. Selling goods on eBay, mowing a neighbors yard for a fee, income from ad on a blog are all examples of such income :)

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