I left a job back in November and had a 401k plan sitting with them. I am now looking to roll it over into an IRA. I have (as far as I see - and maybe I’m missing something) two choices… I can roll it over into a brokerage house or into a bank.
My thoughts were to roll it over into a bank. My reasons were as follows:
I can link it to my checking account so that I will have a high enough balance to get a “good” checking account without incurring fees.
Fund purchases that I make wouldn’t cost me anything (whereas a brokerage house will charge me for trades).
The downside to a bank is that I am limited in my investment options. I can only invest in funds offered by the bank, but not in individual stocks/bonds, etc. To me, however, that is not a big issue. For the most part, I would be investing in different index funds (S&P 500, different cap sizes, etc.) anyway, and not in individual stocks.
Is there anything else I should consider? Am I missing any information?
Zev, you have hit the two most basic options, but given that you will invest mostly in stock based mutual funds I would questions whether a bank would be the best choice. They usually will have fairfly high fees, or offer access only to funds with loads (sales charges). It seems like the savings from a better checking account rate would be hard pressed to make up the cost difference on the investment side.
I would look at somewhere like Vanguard as an alternative. They offer access to a variety of very low cost funds with minimal account maintenance fees. You can also use their brokerage to invest in funds from other fund families if you wish. They have a sterling reputation for ethics, performance and cost and offer plenty of choices.
The cost difference really can be huge. For example, let’s say you had $20,000 to invest. If you invested it in something like Vanguard Wellington you would pay expenses of 0.35% to Vanguard for management of your money. So annually you would pay roughly $70. The average fund expense is well over 1%. So let’s say you invested through your bank and paid 1%, the cost would be $200 per year plus any other fees or loads.
Lest it sound that way I do not work for Vanguard or have any affiliation, I am just a big fan of how they do business and think they are always worth consideration.
I’d just like to clarify one item. The bank will tell you there are no sales charges for the fund. Keep in mind that a sales charge is only one cost. Running the fund itself has a cost. The bank’s funds may charge 1% of assets every year to run the fund. This fee will be taken directly from the fund and reduce your holdings. You would only see the amount if you carefully read the anual report. These are the fees Fruitbat is referring to.
Vanguard is great. They have no sales fees and very low costs. They only caution would be if you had a very small amount. They will impose some fee (maybe $10) for small balances. If your 401(k) is $500, it might be worthwhile to put it in the bank until you can roll it into your next 401(k).
Thanks for the replies. I’m still going to talk to the people at the bank today (it never hurts to get information). I’ll ask them about the fees in the funds themselves. What would be a good cost percentage? IOW, what would X have to be in order for me to say “Hey, the expense ration is only X, that’s pretty good.”
I would think that something around 1% would be reasonable. I would also l ask if they have a Morningstar report, or you can go to www.morningstar.com and look up the specific fund you are thinking of using. They rate all funds on their risk adjusted performance from one to five stars. I would glance at the star rating, but what you really want to look at is a line called “rank in category”. This tells you how the investment did compared to other similar investments. So, if the number is 20 it means they were in the top 20% of all similar investments for the listed time period. The higher the number the worse the investment did. I find it gives a better feeling for how each investment has fared over time than the star system does.
Another option to keep in mind, if you are moving to a new job, is whether you can roll it over to the 401k with your new employer. This simplifies tracking to only one account. Also, employer accounts usually have low fees since they are high volume.