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That Neglected Old 401(k)

12/6/2016

8 Comments

 
It is given that, over the course of a fifty-plus year career, one may end up having a dozen or more employers. The law requires all employers to continue to administer your 401(k) even decades after you’ve left the company – at little to no cost to you. However, it is a best practice to rollover your ex-employer’s 401(k) into a Rollover IRA soon after you leave. Some reasons why this makes sense:
  1. It’s just easier to have assets in less than 5 bank/brokerage accounts versus a dozen or more.
  2. Your IRA gives you far greater choices (at far lower costs) of mutual funds, stocks or ETFs to invest than any 401(k) ever will.
  3. Your 401(k) may run afoul of regulations if your ex-employer goes bankrupt or undergoes financial stress. 401(k)s need administrative fees to be paid annually by the employer to file the Form 5500 and allow the administrator to do their job. They may not be healthy enough to pay these fees.
  4. Many employers focus on providing 401(k) that minimize the cost to the employer. This usually comes at the expense of higher-fees and limited investment choices for the employees. With IRAs, there are formidable market forces at work to get you the low frictional costs coupled with stellar service. Free-market capitalism works.
  5. If your employer’s 401(k) plan is old (which is typical), it may not have been updated to offer low-cost ETFs and newer offerings that may be in your best interest.
  6. You may move, or your email address may change etc. It may be hard for your 401(k) plan administrator to get you statements etc.
 
You could choose to roll all your 401(k)s into the same IRA for simplicity. That way, these all important assets are in one place, fully in your control. Once your IRA account value is over $100,000, Interactive Brokers may be your best/cheapest option. Further, you can invest these assets in super low-cost diversified ETFs.

Let’s consider the real-life examples of a wonderful couple I have known for over a quarter century. Prakash and Shoba were among the very first employees at my first business, TransTech. They both joined TransTech in 1991 and left in 1995. I sold the business in 2000. Amazingly, TransTech is still around and thriving, but has had three different owners over the last 25 years.

Not only did Prakash just leave his 401(k) untouched at TransTech since his departure over 21 years ago, both of them have left every 401(k) they participated in with every employer! Between them, they have nine 401(k) accounts scattered amongst a diverse range of employers. The good news is that both did participate in 401(k)s at every employer. And even though they did not maximize what they could have contributed in the early years, the value of these assets today is seven figures – a meaningful portion of their networth.

I counseled them to take a little time and move all these orphaned 401(k)s into rollover IRAs. They have promised to do so, which is great. However, they are not alone. A few days back, The Wall Street Journal ran a great story, entitled, “What Ever Happened to that Old 401(k) You Had?”

http://www.wsj.com/articles/whatever-happened-to-that-old-401-k-1480302720

The WSJ did a great job of providing resources to getting control over these all-important assets that you left behind at some employer that no longer exists decades ago. Participating in 401(k)s and maxing the employer match is important. Of nearly equal importance is the rollover of these assets when you say goodbye to your employer.

Finally, KISS (Keep it simple, stupid), is a great way to go – as our mythical hero Sonia Patel did:
​
https://www.youtube.com/watch?v=sk2gJ3TCNSQ

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8 Comments
Suresh
12/22/2016 02:29:38 pm

Sir, I greatly admire your work!
How safe is it to keep 401k nest egg in Interactive Brokers Vs say IRA account in Fidelity or Chase (they have banking operations etc. I guess.). If for some reason IBKR goes broke, 401k account may take a hit...clarification on this "safety" aspect would be helpful.

Reply
Mohnish Pabrai
12/23/2016 06:33:16 am

Interactive Brokers is a major brokerage firm. They are tightly regulated and cannot comingle client assets with theirs etc. Fidelity has no banking operations. Neither does Schwab. I don't see any of their clients have issues due to the broker going insolvent etc.

If you are concerned, you could spread between a few brokers, but I think any losses due to broker financial stress are extremely unlikely.

Reply
Suresh
12/23/2016 09:14:51 am

Thanks a lot for the clarification..!

Bakul
2/4/2017 10:54:21 am

Mohnish,

It's an excellent suggestion to consolidate previous employers' 401(k) accounts into one Rollover IRA account. Over a span of 30 years, I have rolled over 6 401(k) accounts into one Roller IRA.

My strategy was to roll over the 401(k) account as soon as practicable. Some employers had a wait period of 30 to 60 days before a rollover could be affected. My reasoning was that, in the earlier years, only a small set of mutual funds were allowed in those 401(k) accounts. But once rolled over to the Rollover IRA, there are more choices of mutual funds and stocks as well. Nowadays, ETFs can also be considered.

Reply
Mohnish Pabrai
5/17/2017 05:48:04 pm

Thanks for the nice note, Bakul.

Reply
Praveen
4/28/2017 08:32:12 am

Why Interactive Broker and not Vanguard? Please elaborate.
Thanks

Reply
Mohnish Pabrai
5/17/2017 05:47:37 pm

Interactive Brokers has one of the lowest trading fees. The key concept is to roll over your 401k into an IRA so that you have full control over it. It does not matter whether you use Interactive Brokers or Vanguard for this.

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Leather Jacket link
2/21/2023 12:57:37 pm

There is so much in this article that I would never have thought of on my own. Your content gives readers things to think about in an interesting way. Thank you for your clear information.

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    Mohnish Pabrai

    Mohnish Pabrai is the founder and Managing Partner of the
    Pabrai Investments Funds, the founder and CEO of
    Dhandho Funds, and the author of The Dhandho Investor and Mosaic. 

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