My 401(k) has approximately $3,000. Not a huge amount, but I don't want what I've saved to be consumed with fees for managment without some hope of a result. I assume I will be employed again in the near future, but since I'm not I can't just roll it over into a new employer's plan. It looks like I am also getting hit with a transfer fee of $100, so if I transfer it too many times, I might as well just take the cash disbursement. So really, I just want to make the transfer count. It's currently being held by John Hancock pensions. Thanks for your help.
Hi Daren! I'll say that I am a fan of Vanguard and Fidelity funds as they have low entry costs, so you can make a purchase with $3000, and low fees. Almost every time you transfer, you will see a transfer fee, so it is smart to try to find the best "home" for your funds and leave them there.
You will want to do a direct transfer to your new custodian - don't take the cash if you can avoid it! Taking your distribution as a check payable to you will cause you to have a taxable distribution from your plan if the funds are not deposited into an IRA within 60 days. A direct transfer will avoid this from happening as the funds are sent directly to your new account from your old John Hancock account. Good luck to you!
Vanguard and Schwab would be good places to start with either low cost, index based mutual funds or exchanged traded funds (ETFs). If using ETFs, be sure to use ones that are available at Schwab, for example, that trade without any transaction fees. It will also be important that you are able to fully diversify your money consistent with an asset allocation objective (stocks, bonds and cash) that you are comfortable with from a risk/reward perspective. While another recommendation in this tread noted the Vanguard Total Stock Market Index Fund, which is an excellent, well diversified stock fund, you would not own any fixed income (bonds) or cash/cash equivalents. You may want to consider a Vanguard life-cycle or target-retirement date fund that can achieve broader diversification for you in a single mutual fund investment. John
First, I applaud you for not cashing in your 401(k) balance. Too many workers make the mistake of cashing in their 401(k) balance after they leave their employer. They believe the amount is small and will not impact their retirement standard of living. But even a small amount can grow to a large balance if given time and the proper investments.
Because the provider of your 401(k) is an insurance company there is a good chance that you can reduce your investment fees in a self-directed IRA. It can make sense to stay with the 401(k), especially when your balance is smaller because the 401(k) may be easier to diversify. This is because there should be no minimum investment requirement in any of the 401k plan investment options.
Consider opening a self-directed IRA at one of the discount brokerage firms such as TD Ameritrade, Schwab or Fidelity. That will give you the best access to mutual funds and exchange traded funds. If you move to a fund company you will be limited to the funds offered by that fund family. In a brokerage account you will be able to select from an extensive menu of NTF mutual funds and exchange traded funds. NTF stands for No Transaction Fee. But be aware that these are not free of cost, just free of a transaction cost to buy and sell. NTF mutual funds come with slightly higher annual expense ratios, called 12b-1 fees. These fees range from 0.25% to 0.35% per year (of your investment value) and are paid to the discount brokerage to compensate the brokerage. NTF exchange traded funds do not have that extra 12b-1 fee. In this case the brokerage is enticing investors to buy and sell the ETF to create liquidity. Brokerage firms also make money by keeping the spread between the bid (price you can sell at) and ask (price you can buy at). But all investors pay bid/ask spread cost whether the ETF is NTF or not. So if the NTF menu is extensive you should be able to diversify with minimum transaction and annual fees.
Hope this helps.
You are right to be concerned about costs in small accounts. A $25 annual IRA fee may be no big deal if you have $100 G, but it is a significant charge on your $3000 account. Add in brokerage transactio fees, mutual fund fees, etc., and a small account can start to wither under the assault. Vanguard may be your best bet for low cost. Don't worry about fund selection. You are only going to choose one or two diversified funds, you don't need a broad brokerage platform for that. good luck.
While I like Vanguard funds and their low-cost strategies, you may want to consider getting some advice on the best way to invest it initially, and how to manage it after the initial investment. That's where you may consider a fee-only advisor, or an advisor that you know that will be able to invest it with you and have an active role. If you don't like the fee structure, whether fees for on-going management or commissions up-front, you may still want to pay someone occasionally to review what you are doing and propose changes going forward. It may help you sleep better at night and not second-guess yourself should you not like what the market is doing.
I like Fidelity, primarily because I use Blackrock iShares ETF's and they trade commission free on Fidelity's platform. You can also go to the Blackrock website and design a custom low cost index ETF portfolio for free.