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Is it worth combining my 401k's when they both seem to be doing about the same? Additional investments on top of 401k?

So I'm currently 33 and though my investments seem to be on the right track I am wondering at what point I should combine my larger 401k with the smaller one I currently am adding funds to. My current employer matches about 3% on top of my 12% I am sinking into a Fidelity 401k and my Personal Rate of Return from 01/14 - 05/14 is at 2.28%. My older much larger 401k is with T.Rowe Price and its 3month/YTD/and 1Year results are as follows: 4.11% (3m), 1.44% (YTD), and 17.04% (1year). It's really hard for me to consider closing the T.Rowe one when I haven't put a drop in it since May 2012 and it has increased on its own about 40%. Additionally I am looking to invest an additional 10-20k that is making next to nada in my savings. I'd prefer an invest n forget option as opposed to something like eTrade, since my time is limited. Am I at the point in my financial life were I need to hire an adviser?

May 25, 2014 by Brett from Charles Town, WV in  |  Flag
9 Answers  |  12 Followers
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6 votes
Peter C. Karp Level 20

Brett,

First of all congratulations on getting started early investing for your retirement. I believe it is important for everyone to seek guidance from an experienced financial advisor in order to make sure your investments are properly positioned to meet your goals given the ever changing economic climate. The other advisors have made some good points. The advantage of consolidation is to reduce fees and allow you to manage your investments in one place. Be sure to maximize your contributions in your current plan (2014 limit is $17,500) to take advantage of your employer’s match otherwise you are leaving money on the table. You might also consider contributing to a IRA or Roth IRA with the additional monies you want to invest as this would provide you with an alternative to low interest savings account. Consult with an experience, fee only advisor and tax professional to help you make the right investment decisions. You may contact our office if you would like to discuss your financial position in greater detail.

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.

Comment   |  Flag   |  Jun 02, 2014 from San Francisco, CA

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2 votes

Good job saving aggressively! I echo what Larry says - it isn't that the older account is "better" - and the returns are not due to any magic at T Rowe Price (although they are a fine shop). The returns are due to the fact that the money in that account was invested heavily in stocks in 2013, which happened to be a record year for stock investments. If you had most of your money in the stock investment options in your Fidelity account, you would have done just as well. The primary reason to consolidate is for simplicity and ease of management. It is harder to keep on top of multiple accounts. As Larry points out - investments that appreciate rapidly in up markets will often fall rapidly when the market falls. But you are young, so when that happens (and it is WHEN, not IF) remember there is no need to panic. Just keep investing, keep contributing, and pay no attention to the ups and downs.

3 Comments   |  Flag   |  May 27, 2014 from Bridgewater, NJ
James D. Kinney, CFP®

Oh, I missed the other part. You are never too young to hire an advisor. I love when younger people hire me, because I feel I can have a greater impact helping them shape their future if I help them get a good early start. But realize that some "advisors" are really "salespeople" first. I believe a Fee Only advisor is the best choice. Fee only advisors do not sell any product. Many will work with you for a modest hourly fee - and you may get all your questions answered in an hour or two. Find a fee only advisor near you at www.napfa.org.

Flag |  May 27, 2014 near Bridgewater, NJ
James D. Kinney, CFP®

or you can search for an advisor on this site - just make sure you are searching for an advisor that has compensation of fees, not commissions. Again, this is my opinion only - and there are perfectly trustworthy folks who get paid commissions. I just think when you pay the advisor for advice, the advice is going to be based on your best interest. When an insurance company is paying the advisor (or investment company) then the advice is more likely what is in the insurance company's best interest.

Flag |  May 27, 2014 near Bridgewater, NJ
Brett

First sorry for the slow response, I didn't follow my own question and had a surprisingly hard time finding it again when I did go back (never received emails saying there were responses so figured there were none). Thanks for the tips and I'm not too worried about crashes, I expect 4 or 5 more before I retire. Luckily during the last I was working overseas so when the marked bombed I was pumping 22% of my income into the 401k, had a great bounce back but within a year company changed 401k's so all those shares I had got clumped elsewhere.

Flag |  Jun 02, 2014 near Charles Town, WV

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2 votes

Brett, Most of the other advisors have done a fine job addressing the performance issues between the Price 401k and the Fidelity 401k.

Personally, I would keep the old 401k exactly where it is - not for performance or fees, but because of the additional flexibility that it offers you.

You see - you can withdraw from that 401k - without the normal 10% early withdrawal fee - as early as age 55, since you are no longer employed at that company. This gives you an additional 4 and 1/2 years of planning flexibility, in the event that you are disabled laid off... or you merely want to retire "early."

The 401k plans are required to allow this early withdrawal if you have departed service from that employer. Here is a link to the IRS guide to the plan sponsors:

http://www.irs.gov/Retirement-Plans/Plan-Sponsor/401(k)-Resource-Guide---Plan-Sponsors---General-Distribution-Rules

Jon Castle PARAGON Wealth Strategies, LLC Jacksonville, FL http://www.WealthGuards.com

2 Comments   |  Flag   |  May 27, 2014 from Jacksonville, FL
Brett

That's some really helpful knowledge, I don't plan on still being house-poor at 55 but who knows what will happen in the next 20+ years so being able to withdraw early from one and still have 401k nest-egg if needed sounds nice.

Flag |  Jun 02, 2014 near Charles Town, WV
William Ewalt Deshurko

Just a correction. If you leave the 401(k) at the former employer you CANNOT withdraw it at 55 without a penalty. Here is the quote from the IRS: "...(distribution) Made to a participant after separation from service if the separation occurred during or after the calendar year in which the participant reached age 55." Since you were under 55 when you separated from service this does not apply.

Flag |  Jun 13, 2014 near Dayton, OH

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2 votes

Brett, you have options, and there is justification for whichever option you choose.

If you keep your T. Rowe account, you will have those investment choices available. True, as being separated from service, you can take withdrawals at age 55. But, as you appear to be a good saver and fiscally responsible, I would not be too concerned about what might or might not be your situation 20+ years from now.

If you roll the T Rowe account into Fidelity, you will have the ease of having only one account to manage. For some, having to look at one less statement is a huge relief. For you, because you are taking an interest, it may not be any less of a burden. You might, in fact, prefer to manage 2 different accounts. A third option is to roll your T Rowe account into a rollover IRA. The advantage of this, is that you have a much larger universe of investment options, and that your fees may be lower. To determine what your actual fees are on both of your 401(k)’s, go to your respective 401(k) portals and download their 404(a) Fee Disclosure Document. With the information that I have, this appears to be the option you may want to spend more time investigating.

The returns that you mentioned do not mean very much to me, because it does not indicate anything about your investment style, risk tolerances, what is was invested in, or anything about you. I believe, in general, if you invest is similar asset allocations in both Fidelity and T Rowe Price, you should expect to get similar returns. Just as an exercise, if you look at a similar investment choice within your Fidelity universe to match your T Rowe investment, how did it perform over the same time period?

I think it is time for you to consult with a financial advisor in your area, preferably a CFP®. If you need to, seek referrals from from trusted friends, neighbors, co-workers. I encourage you to take an interest in different types of investments and how they perform in different economic environments. Pay attention to the talking heads on the financial channels; don’t just follow one as gospel, but take in various sources of information and develop your own investment style. This way, when you consult with a financial advisor, you will have the knowledge to form an opinion as to whether he/she has a connection to you.

View all 4 Comments   |  Flag   |  May 27, 2014 from Delray Beach, FL
Michael Steven Greenberg, CFP®

I was not implying that he follow the advice of any talking head, but in the context of achieving a longer term goal of being knowledgeable about investing in general, he should do research, including listening to the financial channels

Flag |  May 27, 2014 near Delray Beach, FL
Brett

I'd definitely would need to do some reading up more. Outside my 401k I've got a few investments here n there, one I bought back in High School and forgot about for 10 years, luckily my shares doubled and it went from the $2 I bought it at to sitting round $60 atm..but that was more pure luck then any investment research.

Flag |  Jun 02, 2014 near Charles Town, WV

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2 votes
Daniel Glanville Level 10

Eric,

I am sure you are busy absorbing all this information so I will keep this brief. I 100% belief you should seek an advisor. Utilizing financial advice historically yields 3% more on your investment after fees. As far as what kind of advisor, make sure he is some one that can work with all your accounts, including your current 401(k). And be sure he would not move your money out of that current plan. The matching and vesting schedule at your current employer cannot be matched outside of your account (25% bonus, vesting, and tax advantages). Not all advisors have the capability to work with a 401(K) at a current company while leaving it there. Also, you need to check to make sure your company has the ability to get outside advice (called a brokerage window). You can look that up on this website or have an advisor look it up as well. If not, it is a fairly straightforward process to add that to your plan. The reason this is important is that it is important that your advisor build a comprehensive plan for and can help you with all your financial needs (all retirement accounts, insurance, estate planning, mortgages, etc.). It is best to have all this information available from one place. As far as fee vs. commission, that should not worry you (by the way I do both). Rather, is the advisor independent of a large firm, and is he or she objective.

2 Comments   |  Flag   |  May 27, 2014 from Colorado Springs, CO
Daniel Glanville

Sorry, Brett. Not sure where I Eric from.

Flag |  May 28, 2014 near Colorado Springs, CO
Brett

Thanks for the info and no worry about the Eric thing!

Flag |  Jun 02, 2014 near Charles Town, WV

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1 vote

Hello Brett,

If your current 401(k) with Fidelity offers a good range of investment options, then consolidating into it makes good sense.

While investment expenses do matter, the difference in performance you experience between Fidelity and T. Rowe Price will have very little to do with the company sponsoring the investment options. Rather, it will have everything to do with how your portfolios are allocated to different asset categories and how those categories perform over a particular time period.

Be aware that assets that rapidly increase in price--like the 40% increase in your T. Rowe Price 401(k)--can drop just as rapidly, especially if the underlying fundamentals don't support such elevated prices.

On your question about hiring a financial adviser . . . a good financial adviser will help you with far more than just investment matters. Genuine financial planning involves investment, retirement, taxation, estate matters, risk management through insurance, and cash/debt management. If you could benefit from guidance in those areas (and many people can), then yes, hiring a financial adviser for at least a financial review may be helpful to you at this stage.

Hope that helps. All the best.

1 Comment   |  Flag   |  May 25, 2014 from Clackamas, OR
Brett

Thanks for the advice, and I'm definitely more worried about investment than anything else at this point!

Flag |  Jun 02, 2014 near Charles Town, WV

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1 vote

I would not get caught up on short term returns. You can usually build similar portfolios within most 401ks. Or at least get access to a decent target date fund.

What can be drastically different is the fees you pay. Often you can hire an advisor and pay nearly the same you are already paying inside the 401k. Usually, you can roll your 401k into an IRA and substantially increase your investment universe while also having a professional work directly with you for about the same cost.

The time to hire an advisor is yesterday. It depends somewhat on your asset level, but it sounds like you probably have a large enough balance in your old 401k to get a decent advisor. As soon as you can find a non-commission advisor that will work with someone at your asset level you should. A good advisor is the "invest it and forget it" option you describe. An advisor will do all the things needed you don't have time for (investing, monitoring, rebalancing, trading, etc) as well as provide an actual financial plan. No one ever saves money by doing it themselves. It has nothing to do with someone's intellectual ability to understand investments and everything to do with their inability to monitor their financial life on a daily basis and keep from being swayed by their emotions because it is their own money. An qualified, objective, third party whose job is to manage your investments and financial life is worth far, far more than the nominal fee they charge.

2 Comments   |  Flag   |  May 27, 2014 from Tulsa, OK
Brett

I'm not too worried about short-term rewards, of course I wouldn't complain if someone makes it so I can retire tomorrow but I am definitely realistic about things. It definitely seems like I need to start chatting with some local advisors!

Flag |  Jun 02, 2014 near Charles Town, WV
Eric Burkholder, CFA

Also, since you are younger work with a younger advisor. Not someone right out of school, but someone qualified with some experience. The last thing you need is your advisor to retire when you are 50 or so and making some of the most important financial decisions of your life.

Flag |  Jun 02, 2014 near Tulsa, OK

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1 vote

Hi - Reasons to consolidate: so you don't forget about the account and have to track it down 10 years from now, your former company can move to a new vendor and transfer your investments without your permission, and you might be charged additional account fees since you aren't employed there any longer (instead of the employer picking up the tab).

Reasons not to consolidate: fees (usually lower in a group 401k but not always), more investment options to choose from, more flexibility in when you can withdraw it, more control over the account.

Reasons to consider rolling to an IRA: see above (careful with fees) and you want investment options that aren't available in the plan.

What they said about performance above is correct: time periods are different, so it's hard to judge which actually did "better." Instead of would worrying about that part, set yourself up for the future with investment options that meet your risk criteria going forward.

Good luck!

1 Comment   |  Flag   |  May 29, 2014 from Alexandria, VA
Brett

I'm a little worried about the whole company moving thing as that happened when I was working overseas, I should probably see as I'd hope T Rowe Price could flag my account and give me the option to roll it into an IRA and stick with them if the Company plans to move their 401k elsewhere.

Flag |  Jun 02, 2014 near Charles Town, WV

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0 votes

In working with my clientele this topic often comes up. Some things to keep in mind... 1) If you leave it with your former employer you unfortunately are not kept abreast of any changes to the funds, legal issues, etc. Also, there is generally no education from the provider's end for someone that is in PRA status so you are completely on your own. 2) One major worry of moving it into your current company's plan and consolidating is that now when a specific investment goes down sharply you have more coins in the game so to speak. You are also limited to the fund choices in the 401(k) plan which may not make sense to put additional assets in that don't get a match. 3) By opening up an IRA and moving the money from the previous employer you now have full control on this asset. You'll have a dedicated representative assisting you, and options that aren't available in a group retirement plan are now at your fingertips. You may pay higher fees, but generally I've found folks enjoy a healthier investment when going the IRA route. Depending on your personal preferences you may want to look into investing into an IRA within a variable annuity. Some perks you may receive from doing this are locking in your current asset and protecting it from potential market exposure, guaranteed lifetime income stream (think of a personalized pension), and depending on the provider there is usually a nice guaranteed step-up in place to raise that lifetime payout. In most contracts these days you still have 100% control on your asset even after electing the income option and the only drawbacks are a bit higher fees and a surrender penalty period usually between 7-10 years. This generally is a non-issue since the money is being saved for retirement purposes anyway and you may elect 10% per year penalty free.

Hope this helps! Travis

3 Comments   |  Flag   |  Jun 11, 2014 from Indianapolis, IN
Eric Burkholder, CFA

Variable Annuity inside an IRA is a bad idea for most and a horrible idea for someone this young. Wrong on so many levels. If someone has 20+ years to invest it never, never makes any sense to pay VERY HIGH fees for features you will never need or use. The only decent benefit of a VA is tax deferral which he ALREADY has inside the IRA. This is crazy advice, Think how much the 2.5% more in fees is going to eat his account over 20 years. CRAZY.

Flag |  Jun 11, 2014 near Tulsa, OK
Daniel Glanville

Within an IRA a variable annuity MAY not be the best option. However, there are companies and organizations that are structured this way and have cut down on the fees. This is especially true in 403(b)s and 457s. Many/most universties and public benefits are set up in this format and use annuities as one of the "vehicles" for investments because of the tax-deferred feature. Plus, you are limited in how much you can put into an IRA annually. Using a VA or life insurance can be an effective way to invest beyond what your traditional IRA or Roth IRA will allow and get that tax deferral. You could pay 2.5% in fees, but your might be paying 25% or more in taxes somewhere else. Obviously, you have to look at the whole plan in order to know if this is appropriate. I did not used to be a fan of annuities as part of the plan, but when you look at what the way they have changed/evolved they can be key in a solid plan.

Flag |  Jun 11, 2014 near Colorado Springs, CO
Travis Robert Scott

Eric, I failed to see his age before my answer. I agree at his age an annuity will not be the best option. However, I do fully disagree with the statement of the only benefit to a VA is tax deferral. Yes, this overlaps the IRA benefit but an IRA does not give a guaranteed stream of income for life, protection against market risk, inflation risk, longevity risk, or sequence of return risk. Before you bash a product make sure you know more about it. Again, an annuity for Brett would not be my initial recommendation but it is a very good solution for those nearing or in retirement. Also, research the fee structures... yes some providers have high fees, others do not. I know of one that is only an additional 95 basis points compared to a standard IRA mutual fund account. To many this expense is well worth the piece of mind it gives them when planning for their retirement years. Not to mention it allows them to be more aggressive with their allocation over time which will most likely more than compensate the additional fee.

Flag |  Jun 12, 2014 near Indianapolis, IN

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