What do you do with 401(k)s leftover from former employers when you get the cold shoulder from investment firms?
I am with a new employer in the Boston area and do not participate in the company 401(k). I will soon be eligible to join soon. I need to find out how to rollover to the 401(k) plan. Now I am saving in a regular bank savings account and want to use this money for the 401(k). I also need to roll over two 401(k)s with a total of about $50,000 as well as by year end I will have about $50,000 in savings. I am a small investor compared to most and I seem to a cold shoulder from investment firms?
I realize that is not much money in the investment world, but I wish to make it work for me as much as possible until I retire in about 5 years. What are my options?
Answer from the Boston Money Coach:
You may be talking with the wrong investment firms if you are being ignored. Consider speaking with a fee-only financial planner who may be able to manage investments directly for you or at least provide you with periodic advice that you can implement on your own. (Members of the Financial Planning Association, Paladin Registry, National Association of Personal Financial Advisors or the Garrett Network may be good options to consider).
You should recognize that while you may roll your old 401(k) plan balances to your current employer’s plan, you will have more choice in your own rollover Individual Retirement Account (IRA). Even if you do roll your accounts to your new plan, you are going to be in the same predicament because you will have little guidance in how or what to choose for investments appropriate to your time frame.
At least a fee only planner may offer an hourly rate or flat rate plan to help you decide what to choose from the limited menu offered from the new 401(k).
Don’t Forget About Emergency Reserves
You also need to know that the $50,000 you have saved while not participating in the employer’s 401(k) plan is something that cannot be combined or rolled into the 401(k) since it is after tax money. You can consider a portion of it to open a Roth IRA assuming you meet the income limits for your tax filing status.
After setting aside a portion to cover your “emergency reserves” you may earmark the rest for your retirement and invest it directly in a taxable brokerage type account.
Know Your Risk Profile
I always suggest that folks get a handle on their risk profile. This may be done with the tools offered on the 401(k) administrator’s website. I think that a better one is offered by www.RiskProfiling.com. There is a nominal charge (about $25) but it’s probably worth it as it goes into greater detail. And having a handle on risk is needed before setting an investment asset allocation or choosing individual investments.
After that you may consider a set of core holdings. If you go the IRA rollover route, you can access some very good mutual funds or Exchange Traded Funds offered by Vanguard. (You’ll have access to many of the lower cost Vanguard options through an advisor but you can also get them directly through the retail consumer side of Vanguard if you choose to open an account directly).
Core Options for Your Investing Foundation
This core could include the following Vanguard choices: Total Stock Market (VTSSX), Total Bond Market (VBTSX), Total International Stock (VTSGX or VTWSX), High Dividend Yield Index (VHDYX), and Total Real Estate (VGRSX). The allocation will depend on your age and risk profile. An adviser may be able to help narrow this down for you but in general you should consider at least 10% to 15% to the International Fund, 5% to 10% in the Real Estate Fund, 30% to 45% in the Bond Fund and the balance in the US Stock Fund.
I prefer the Exchange Traded Fund versions and access them without trading commissions but this is not an option for a retail account. So the mutual fund varieties may be a better choice.