Ask MAX: What should I do with my old 401(k)

September 1, 2006

Dear MAX,

A while back you helped me with my 401(k). Although it's only been a short time I was very satisfied with your services. I have since moved on to another company and I hope once again you can assist me with my new 401(k) options.

Do you have any advice on what I should do with my old 401(k)?

Kind regards,


Would you leave your personal belongings in your old desk? Take your retirement money, along with the pictures of the kids, when you move on to bigger and better things.

The best choice for your old 401(k) is to roll it over into a low-fee broker like Firstrade where you can buy any number of funds, or to a fund family like Vanguard with a wide selection of low-fee funds.

Moving your old 401(k) plan – or 403(b) – is better than leaving your 401(k) at your old employer with their limited selection of often high-fee funds or even moving the old plan to your new employer’s plan, as the new plan will likely have the same shortcomings.

While you can't combine this old 401(k) with a ROTH, you can combine it with other traditional IRAs and maintain the account’s tax-deferred status. The downside of combining it with other accounts is that you can’t move it back to a 401(k) at a later date – it’s been sullied by the other money, so to speak.

The likelihood of your new 401(k) being better or cheaper than having the money in an IRA at a low-fee, multi-choice locale is near zilch, so who cares? You can keep the money in a separate IRA (conduit or separate rollover IRA) if you are dying to move the money back to a 401(k) some day.

There used to be one upside of keeping the money in a 401(k) – protection from lawsuits. Your IRA was fair game in bankruptcy court, unlike employee-sponsored retirement accounts operating under the Employee Retirement Income Security Act (ERISA) rules. The new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 shields your retirement account from creditors whether it is an IRA or a 401(k). Now you can owe millions and still live high off the hog because your IRA is safe from creditors!

Be sure to watch out for IRA maintenance fees. Though most low annual fees will still likely be cheaper than the hidden costs of the mediocre, expensive funds in your old 401(k), you can easily figure out ways to keep these IRA fees at zero, either by meeting a certain combined account size at a broker or fund company, or just choosing an IRA fee-free zone in the first place (like Firstrade or Scottrrade).

If you don’t need a plethora of fund choices or you simply don’t want to manage your account yourself (if for some strange reason that defies all earthly logic, you do not want to use our Powerfund Portfolios to make this job easy and fruitful!) there are simple options that are still better than leaving the money at the ole’ salt mine.

Move the account to Vanguard and go with a one-fund portfolio like their Vanguard STAR (VGSTX) fund, a very low–fee, moderate-risk total portfolio fund with a $1,000 minimum. Alternatively, assuming you plan on retiring in about 30 years, go with Vanguard Target Retirement 2035 (VTTHX), which you can buy and forget for decades (the fund ages with you and gradually gets more conservative as you do – not politically, just in terms of risk aversion). If you don't plan to retire for forty years, consider the Vanguard Target Retirement 2045 fund (VTIVX). You can do it all online at or call 800-997-2798.

This one-fund simple solution is still better than leaving your money at the old employer, where you will still have to make fund choices yourself or choose from the often more expensive all-in-one investment options in your old or current 401(k).



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