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How to deal with 401(k) when jobs change


I will be retiring in 17 years and recently had a professional help me select funds for my 401(k). Since then, I have changed jobs, and my new employer does not have a retirement plan. I would like to create my own portfolio of IRA investments to match this recommendation, but am unsure how to select quality funds to match my adviser's asset allocation goals without creating a half-dozen separate accounts with different mutual fund companies. I will eventually want to roll over the 401(k) to the new IRA. What should I do?

- J.M., Geneva, Ill.

When you leave a job, you often don't have to remove your money from your old 401(k) plan. Generally, if you have about $5,000 or more in the plan, employers let you leave your money in it.

So, if you received competent help selecting mutual funds, and are happy with the funds you have, you could leave the money where it is. I would move the money to an IRA, however, if you don't like the funds within the 401(k) or if your adviser struggled to find the variety of funds he thought you needed.

I would also move money out of the 401(k) and into an IRA if you have reason to believe your old employer might be mishandling your 401(k) deposits, or if the 401(k) plan charges high fees.

I would pay close attention to fees. They can range from a very low 0.12 percent to a very high 2 percent, according to Hewitt Associates LLC, a benefits consulting firm. That may not sound like much of a difference. But it is. For example, if a person had $100,000 in a 401(k), and her fees were 1.5 percent, she would have about $286,160 in 17 years if her investments were averaging an 8 percent annual return. But if she was able to pay just 0.5 percent in fees, she would have $339,770. Try your calculation at www.sec.gov/investor/tools/mfcc/about-costs. htm.

Ask the administrator of your 401(k) for all the fees you pay. This should include administrative fees for running the 401(k), plus fees on the individual mutual funds. The mutual funds might charge you different ways - with sales charges that are called "loads," and fees for running the individual mutual funds. These charges are called the "expense ratio."

If the expense ratio is more than 1.4 percent, you are probably wasting money. About 1 percent would be better; less than that would be best. Studies show cheaper funds actually perform better than those that charge you high fees. If your 401(k) offers you a low-cost fund like a Standard & Poor's 500 index fund, or a "total stock market index fund," you probably have a good deal.

Moving your money to an IRA requires you to do a similar analysis of fees. If your goal is to invest in multiple funds from different mutual fund companies, you will probably want to choose what's called an investment "supermarket." The key to choosing them is finding the funds you want and analyzing fees you must pay - such as transaction fees and the expense ratios for individual funds.

In selecting funds, what matters most is what each individual fund invests in. You might see a fund called something like the "Best Ever Small-Cap Fund." What matters is "small cap," which describes your fund's specialty. Your fund manager will be choosing stocks from small companies for you.

You can also open an IRA at a mutual fund company such as Vanguard or T. Rowe Price, which offer Target Maturity Funds. You put your money into a single fund that has your retirement date on it. Then a manager chooses the amount of small caps, large caps, international stocks and bonds that are considered optimal for building your nest egg.


Messages for Gail MarksJarvis also can be left at 312-222-4264.

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