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What Should I Do with My 401k After Leaving a Job?

What Should I Do with My 401k After Leaving a Job?

One of the first things that people think of when they leave their job is what to do with their 401(k) from that employer. While there is plenty of advice out there, much of it could be conflicted with pre-existing bias, depending on what benefit certain people or entities have in moving it or making it stay put. Hopefully, the options below will assist in your decision-making process as you decide what to do with your old 401(k). 

Three Options for Your Old 401(K)

For those looking for a quick and dirty list of your potential options for the 401(k) from your previous employer, that’s below. We dive further into each possibility and its pros and cons in the rest of this piece.

  1. Leave It
  2. Roll It Into Your New Plan
  3. Roll It Into an Individual Retirement Account (IRA)

Note: if you have a Roth of after-tax option, it does not impact the advice given here, though there are some nuances to Roth that should be explored as well.

Related Reading: What to Do With An Old 403(b)

1. Leave Your 401(k) With Your Previous Employer’s Plan

In most cases with 401(k) plans, as long as you have a balance that is large enough, you are not forced to do anything. Your investment options will likely remain the same, and you are simply put in a “separated service” section of participants. The pros of selecting this option? You will still have the ability to receive reports and reallocate the assets when you see fit. While you cannot contribute to it, you may hold it at the investment company. It’s not always the case, but typically, the larger the 401(k) plan, the lower the expenses. There can be some economies of scale that may allow you to reduce prices on some of your funds as well as administrative costs. 

The downside to leaving it there is that any changes to the 401(k) product company or investment lineup will impact you. If you like a particular fund and the plan sponsor gets rid of it, you will not be able to keep it. You are also governed by the plan document of the plan, which is basically the instructions that the participants have to follow. There can be additional fees that are passed down to participants as well, including potential financial advisory fees.  

 

2. Move Your Old 401(k) to Your New Employer’s Plan

If you are moving to a new job and you are offered another 401(k) plan, regardless of whether or not you are eligible to contribute funds out of your paycheck, you should be able to roll your existing 401(k) balance into the plan. This will be a tax-free event, and you will have to select new funds out of the lineup your plan sponsor offers. You likely will have to call your previous 401(k) company to initiate this rollover, and in many cases, there is paperwork involved. This allows you to consolidate your assets into one 401(k) plan for potentially better continuity in your investments. 

The downside is that fees may not be lower than your previous plan and the investment lineup will also be different. You could have fewer choices than your last plan, as well, so you will want to do a full side-by-side comparison of each plan’s investment options, expenses, and documentation to assure that this is the best option for you.

3. Roll Your Old 401(k) into an IRA

The “I” in IRA stands for individual. If you prefer to have more control over your assets, this may be a viable option. This involves contacting your previous employer and instructing them where to send the assets. It will remain free of taxation if you move the assets to an IRA held at a financial institution for your benefit (also known as FBO). For example, the check could be made payable to Charles Schwab FBO Jane Smith. An IRA is just a checkbox from the IRS, in that there is a significant amount of choice available to you in investment options. You may buy stocks and bonds, ETFs, mutual funds, real estate, cryptocurrencies, savings accounts, and many other options. 

The downside to rolling your old 401(k) into an IRA might come down to choice. There can be an overwhelmingly large amount of choices. Each choice carries its own risk and fees as well. Many financial advisors often recommend that clients roll their assets into IRAs. 

But this isn’t free of conflict. In many cases, financial advisors cannot receive compensation in the 401(k) plan, but can if they roll it into an IRA. Before you choose to move your assets into an IRA, you should consider the management fees, expenses, and objectives of your investment versus other alternatives. 

Considering the options above is essential to your future financial picture. Making the right choice can be very important, so take your time to understand how each option impacts you.

ABOUT THE AUTHOR

CLINT WALKNER

FINANCIAL ADVISOR

Clint Walkner is one of the co-founders and managing partners of Walkner Condon Financial Advisors. He is a fee-only, fiduciary financial advisor who works with clients locally in Madison and around the country.

Are No-Fee Custodians Really Free?

Are No-Fee Custodians Really Free?

In the world of investing, it is important to have your money and securities held securely. The vast majority of these investments are held through a custodian. These custodians – Fidelity, Charles Schwab, TD Ameritrade, and others – are often custodian banks and are in the business of protecting clients’ assets and facilitating the tracking of the trades and transactions the client needs to execute in their accounts. Many Registered Investment Advisory (RIA) firms engage custodians on behalf of their client accounts and are tasked with understanding the costs associated with utilizing them. In recent years, many of these custodians have gone away from transaction costs for trading securities per trade and have adopted a “Zero-Commission” or “No-Fee” model. It is important to understand that this does not mean that there is no cost. 

Here are some of the main ways that custodians make money: 

Many custodians do not charge commissions or account level fees and brand this service as a “No-Fee” account. As my mother used to tell me though, nothing in life is free. 

Expense Ratios, Servicing Fees & More

With trillions of dollars on platforms like Charles Schwab, TD Ameritrade, and others, there is a lot of money to be made through the deposits that are often swept into the banks that own these custodians or operate directly with them. Even at small percentage points as low as 0.1%, they can generate billions of dollars in revenue. It remains to be seen if this is the best model for the RIA industry which, like us, works hard to bring value and fiduciary guidance to our clients.

Looking into the underlying fees that Exchange Traded Funds (ETFs) and mutual funds charge and how it fits into our client’s best interest is very important when evaluating the portfolios that are utilized. It is also important to know how those fees are being allocated to the custodians that we use. Since many of the custodians are no longer charging “commissions” for each transaction, there has been a rise in the number of assets that are being held by these custodians, creating an opportunity for them to make more money off of the deposits, cash, and servicing fees than they were able to make charging a commission. 

Managing the Bid-Ask Spread

Managing the bid-ask spread is another way that custodians can make money. The bid is simply the price that a buyer wants to pay for a security; the ask is the price that a seller wants to sell a security. The difference between the bid and ask is called the spread. In many cases, the spread of a security could be pennies. For example, at the time of this writing, the ETF SPY (one of the most frequently traded S&P 500 index funds) has a bid of $414.83 and an ask of $414.84. It doesn’t take a mathematician to realize that the spread in this case is a single penny. Custodians can profit by selling shares at the ask price and buying shares at the bid price (they are called “market makers” in this capacity). Some securities like SPY are traded over 100 million times per day. When that amount of trading occurs, pennies add up. We have discussed this in a past blog when many brokerages reduced their trading commissions to $0

Payments for Order Flow

Payment for order flow is yet another way that custodians generate revenue. Custodians can route trades through high-frequency electronic trading firms such as Citadel Securities. Somewhat behind the scenes to the average investor, Citadel is one of the largest market makers on the planet. By routing trades through firms like Citadel, custodians receive payment in return. Custodians may receive fractions of a penny ($0.001 – $0.002) per share. Again, this can add up when we are talking billions of trades.  

Custodians play an important role in the process for independent fiduciary financial advisors to manage their client’s investments and financial transactions. The partnership that we have together should continue to grow. Knowing where your money is held is vitally important, but it is also good to know how they are making money and collecting fees. Interest is a powerful measure of return on money, and banks are in the business of loaning out money to make money. They definitely have an “interest” in having more deposits and available cash.  

Jonathon Jordan

Schwab & TD Ameritrade are Officially One Firm

Schwab & TD Ameritrade are Officially One Firm

On November 25, 2019, The Charles Schwab Corporation announced their acquisition of TD Ameritrade Holding Corporation in an all-stock transaction originally estimated at $26 billion. The deal was initially a surprise to many investors and even Registered Investment Advisors (RIA) that use the Schwab and TD Ameritrade advisor platforms. However, after doing some research, the deal started to make a lot of sense. Schwab and TD Ameritrade have been competitors for over four decades as “alternatives to traditional Wall Street brokerages”. Both companies serve “do-it-yourself” investors, as well as RIAs. Their missions align to empower both the retail investor and the independent financial advisor to ultimately help people reach their financial goals. Both companies have been leaders in reducing costs for the typical investor by eliminating commissions on equity trading (see our past blog “Commission-Free Trading: Is It a Free Lunch?”). Not long after slashing trading commissions on equity trades, the acquisition was announced. Both firms believe that combining firms will enhance the client experience and further scale operating costs.

On October 6, 2020, the deal was closed for $22 billion.

Why did WCFA add Schwab as a custodian in May?

As we wrote back in May, we believe that the Schwab/TD Ameritrade combined company will offer one of the most complete offerings for our clients. Shortly after the announcement of the merger, Walkner Condon added the Schwab platform to our list of custodians. At the time, we discussed what we thought was the best way to hit the ground running when the merger occurs, and that was to familiarize ourselves with the platform prior to the transition. Additionally, it has offered us the ability to help clients with Schwab accounts that they would like us to manage without having to transfer assets over to another custodian. Moreover, many 401k plans offer a self-directed option with Schwab, so this may also open up investment opportunities for our clients without being required to use their preselected investment lineup. Many clients’ assets, particularly in our International Advisory business, are already custodied at Schwab.

How does this affect existing clients? Do I need to do anything?

The short answer is no. Both Schwab and TD Ameritrade sent emails to their advisor partners (including Walkner Condon) stating that it is “Business as Usual”. Given the size of Schwab and TD Ameritrade, the transition is expected to take between 18-36 months. The advisor platforms, Schwab Advisor Services and TD Ameritrade Institutional, will remain separate custodians until the transition is complete. For clients, this means that if their assets are at TD Ameritrade, they will continue to use AdvisorClient.com to access their accounts, download statements, etc. until the transition is complete. Similarly, for clients with assets at Schwab, they will continue to use client.schwab.com. We will share updates with our clients as we continue to learn more over the coming months and years.

What else do clients need to know?

Clients are probably wondering how their resources, tools, and pricing will be affected by the Schwab/TD Ameritrade merger. Here is a quick response to some of these FAQs:

Am I able to open new accounts on the platform that I’m currently using?

Yes. If your accounts are at TD Ameritrade, you can continue to open new accounts on the platform (same with Schwab).

How will the technology and resources I access online change?

You won’t notice any changes in the near future. At some point, there will be some consolidation of the Schwab and TD Ameritrade platforms, and we will communicate those changes to you when we know more. Again, that is estimated to be 18-36 months from now.

Another note on technology:

The beauty of being an independent firm is that we’re able to constantly reevaluate the tools and technology that we use and procure for our clients. Tools such as RightCapital, Riskalyze, Blueleaf, MoneyGuidePro, etc. will continue to be used as we believe they enhance the client experience. That said, if we find a better and more efficient tool for our clients, we will explore those tools with an open mind. Schwab and TD Ameritrade have never dictated the use of these supplementary tools that our firm has chosen.

Does my pricing change?

No. Your investment advisory fee indicated by the fee schedule in your Walkner Condon Client Agreement stays the same.

What happens to my accounts when the transition is completed?

Schwab has indicated that there will be a “bulk conversion” when the transition is completed in 18-36 months. They have stated that they intend to accomplish this with no interruption to clients’ account history, no new client account paperwork, and no new transfer paperwork.

What is being done to protect my assets and personal information?

Both Schwab and TD Ameritrade have earned their clients’ trust for many decades by implementing many safeguards to keep their clients’ information secure. Protecting information will continue to be a priority during the transition. Designing and testing security procedures is of utmost importance.

We believe that the combined Schwab / TD Ameritrade entity will continue to make investing and financial planning more accessible, allow our advisors to utilize modern tools & technology that will enhance the client experience, and allow greater flexibility of investments & services to help people meet their financial goals. Please be on the lookout for additional communication from us, as well as from Schwab and TD Ameritrade. Please reach out to your advisor for any questions that you may have.