Are we strong candidates to consolidate our retirement funds?
My wife and I (in our low 50's) have 401(k) accounts from 5 different employers. We also both have IRA accounts, individual stock accounts, and other various mutual fund accounts. All together, I count 33 different mutual funds and 5 different individual stocks. I recently performed an exercise to ensure the fund fees were all below 1%; in fact, most of our fees are below 0.7%. We are generally satisfied with their performances as well. Still, should we be moving to consolidate and if so, are there general guidelines as to where we should be moving everything and how to go about doing it?
Fantastic question and thank you for asking!
You may be strong candidates for consolidating, but there are a couple of considerations before doing so.
The fees that you have on the accounts seem reasonable, however, there may be some additional fees to consider. In addition to looking at the expense ratios of the mutual funds, there may also be administration fees and servicing fees attached to these 401(k) plans If, indeed, there are other fees on the retirement plans that you have not noticed or been aware of, your decision to consolidate may be more clear. Also, take note of any fees attached to any IRAs that you are considering, like any annual admin fees or fees for closing the account.
Of course, fees are not the only reason to consolidate. The investments themselves may need some attention. The biggest concern for your portfolio may be overlap and the concentration of your dollars to certain asset classes. You may be way overweight in US Large Cap stocks, which is a common issue for folks with multiple retirement plans and mutual funds. This over concentration could affect your returns as well as your risk profile.
Another big consideration is peace of mind. If having your money scattered all over the place causes undue stress or anxiety, then absolutely, you should consolidate. Many folks talk about the numbers and often overlook the mental health side. I am a firm believer that you can make better money decisions and take better action on your portfolio if you are in a place of peace, as opposed to anxiety.
Lastly, if you are self-managing your investments at this point and you are spending too much time or are starting to have more questions about what retirement is going to look like from a draw down perspective, it may be time to consider hiring an advisor to help get you to and through retirement. There are many advisors that are fiduciaries, that do not sell products, that can truly help you and may be able to reduce your fees even further. I hope this is of some help. If you still have questions, consult with a fee-only financial planner.
Consolidation makes sense, it just does. Consolidation will not affect equity performance, but is a matter of convenience more than anything else. A few clicks and you can see all you've got.
- If your 401(k)s are not active, then you can certainly exercise a 401(k) rollover to your current IRA accounts. The paperwork will be issued from the Plan Administrator carrying the 401(k). The Plan Administrator of the 401(k) will ask you how you would like the check of the proceeds be made out. The most popular is what the IRS calls a Direct Rollover. Here, the check(s) are made out to the 'new' or 'current' custodian with FBO 'Your Name'. Some Plan Administrators will send the check directly to the 'new' or 'current' custodian, but most send the proceeds to you at which point you have 60 days from the date on the check to get the proceeds into your IRA. It's a relatively simple process.
- Regarding the other accounts, consolidation is quite easy as the paperwork from the custodian you choose to use will provide the paperwork. If a new account is being created (and I am assuming you are going to manage these assets yourself), an Application (or go online), Account Transfer Form that will transfer IN KIND the current stocks and mutual funds to the new/current account. It is a VERY SIMPLE PROCESS. Once the paperwork/online forms are in good order. the IN KIND transfer normally is completed in eight days or less.
- Low funds fees are great and if you are pleased then 'stay the course'. WHY 33 MUTUAL FUNDS? Just Asking!
- As far as to 'WHERE' the consolidation be moved to, have your pick. TD Ameritrade, Fidelity, and Schwab are good choices.
You would be well served to consolidate all former employer's 401(k) plans to IRA rollovers in order to save on paperwork, administrative fees, more investment choices, and it is just easier to see everything. You could consolidate your existing IRAs with your rollovers because you will never want to roll the funds from the rollover's back into a 401(k) plan.
Pick a discount brokerage firm you like, open IRAs in both your names, and request direct rollover forms from your previous employer's 401(k)s. Then instead of just looking at the expenses of your funds, look at what these funds are invested in. You could have all your eggs in the same baskets, yet you have different mutual fund brands. See how many stocks are in common between your funds to see if you are over-concentrated in too few stocks. You will appreciate this most when the market sells off, again!
Boy! I’m glad you’re tracking all of your investments. It may be easy for you to manage now when you have the time, energy, and expertise to handle all financial matters, but one client of mine said well, “I thought I’m pretty sophisticated in managing my own finance (he was a VP & worked for one of the Fortune 500 companies), but working with you made me realized you don’t know what you don’t know.” So, I’m glad to see you’re open-minded about further improving your finance.
There’s nothing wrong to spread eggs in difference baskets, however, doing so may result in these possible headaches:
1) Reduced efficiency. One way to test yourself is, “Do you know what percentage of each asset class for your portfolio is?” In other words, can you quickly tell how much percentage in the domestic large cap, small cap, or international asset class in your portfolio? If you can’t, then how do you know you have reached the best possible return based on the risks you’re taking?
2) Estate planning nightmare. Have you designated beneficiaries for all of the 401(k)s, IRAs, and taxable accounts? If you think the paperwork is overwhelming now, it will take a much longer time and more energy and effort for your beneficiaries to track down those assets that are rightfully theirs.
3) Retirement RMDs. You can take a RMD from one IRA account as long as you calculate the amount correct from all IRA balances, but you can’t do that with the 401(k). You have to take a RMD from each 401(k) account. Can you imagine the 50% tax penalty for a miscalculation?
All in all, while you’re thinking about the consolidation, it may be the time to follow through. You will have a much cleaner portfolio to manage and fewer worries down the road. Best!
This an interesting question. It reminds me of a client who came to me with over 125 different holdings. First of all, the task of keeping up with all of the information is excessively burdensome. Next, it's entirely likely that there's a considerable amount of duplication among the underlying holdings. I suggest that each of you consolidate your 401(k) accounts into one Rollover IRA and your taxable holdings into one taxable account each. Then I would review the holdings of each of the funds to identify the extent of the duplication of holdings. After that, it would be appropriate to reduce the fund holdings to the point where each of the funds has a distinctly different focus. As part of the process, you should consider having between a third and a half of your equity positions in international and emerging markets. Also, in the interest of reducing fund fees, you may want to shift from open-end mutual funds to exchange-traded funds, which generally have much lower expense ratios.
The process of consolidating is one that your financial advisor should be able to facilitate. And, of course, I'd be happy to assist if you'd like.