I will be needing to decide if I should roll my 401k from a previous job into the 401k at my current job.

Are some companies which the employer has a 401k through much less appealing than others, or are they all similar?

I'm wondering how likely it would be that the rate of return drastically decreases after rolling over into a similar fund with a different provider.


The primary variable to consider is the selection of funds that each employer provides in their 401(k) plan. If both employers provide a good selection, with reasonable fees, and you are happy picking from that selection, then it doesn't matter much whether you stay or move.

Presuming you are going to participate in the 401(k) at the new employer, I see a slight advantage in moving your existing 401(k) to the new employer. You'll only need to deal with one plan administrator instead of two.

However, there is another option -- rolling the old 401(k) into an IRA. This gives you the advantage of an essentially unlimited number of investing options.

Harper points out another advantage of a 401(k). Money in a 401(k) is protected against most lawsuit judgments and bankruptcy proceedings, while money in an IRA is generally not.


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    And the disadvantage of increased personal liability if you are ever in an injury accident, sued, have a bankruptcy, medical crisis, etc. In many states, creditors can go after IRAs. 401Ks are in trust and can't be touched. – Harper - Reinstate Monica Apr 16 '19 at 20:37
  • @Harper Good point. I've added that to the answer. – Doug Deden Apr 16 '19 at 20:44
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    I originally picked that fact out of Atkisson/Riser's "Asset Protection". And I thought "not relevant, muggles rarely get sued". Then I learned the size of medical bankruptcy in this country. Then I learned just how many magic pills exist that save lives but cost $400/day... and how the pharma companies agree to subsidize the pills to citizens who sign over all their assets. Asset protection isn't just for the Cayman Islands crowd anymore. – Harper - Reinstate Monica Apr 16 '19 at 21:16
  • @Harper do you have a citation for citizens signing over all their assets to pharma companies? – stannius Apr 16 '19 at 22:10
  • Another disadvantage of a rollover IRA is that it can interfere with the backdoor Roth strategy for those that make more income than the Roth contribution limit. Rollover IRA's typically have 0 basis and the basis in all traditional IRAs is considered when doing the Roth conversion for the backdoor Roth strategy. A relatively small proportion of people are in the position of being above the Roth contribution limit though. – T. M. Apr 17 '19 at 0:04

It matters an awful lot which mutual funds they offer, and the loads and expense ratios on those funds.

Any particular 401K offers only a limited number of funds to invest in, commonly a dozen or two. That means only 1-2 each of small-caps, mid-caps, large-caps, bond funds, etc. If you want to add foreign stocks to your mix for instance, you'll only have one or two choices of fund.

They can get you by only offering funds with disadvantageous loads or expense ratios.

As for "rate of return", that question is very flawed. The market goes up and down. That's what it does. 401Ks (assuming you're not near retirement) are betting on the idea that over a very long period of time, the market goes up with absolute consistency. And so, for university endowments (which are "forever funds"), there's a gold-standard of how to invest them. (Heavy in the market; minimize loads, expense ratios, and administrative costs/losses.) That's why a 401K is "in the market" - long-term, it's the place to be.

The market goes up and down. It is unrealistic for a mutual-fund stock picker to think he can always gain value. So instead, they benchmark themselves against the index of stocks in their sector. A large-cap mutual fund compares itself to the S&P 500.

Read John Bogle's book "Common Sense on Mutual Funds". He figured out nobody can beat the index by enough to justify their expenses. So when evaluating investments, you must compare their performance to an appropriate benchmark - the S&P for large-cap funds, etc.

Somebody said "What are you going to do, John? You can't buy the index." Well, John Bogle owned Vanguard. He created a fund called VFINX / VOO which is every stock in the S&P 500. It costs nothing to manage, so its expense ratio is nothing. Several other brokers like Fidelity and Charles Schwab have done the same.

So that's how you measure up an investment, compare it to VFINX or whatever index fund is appropriate for that investment's area of investing.

Let's take a look at this bowser.

enter image description here

It's a large-cap fund so we'll compare it to the S&P 500 and VFINX, which isn't even the cheapest S&P 500 index fund.

First problem is the 5.75% front-end load, as compared to 0% front-end load for VFINX. Buy $10,000, $575 vaporizes and only $9,425 is invested.

This fund has a Class C variant with 1% load, but 1.36% expense ratio.

Next we have the 0.57% annual expense ratio, which is a guaranteed total loss. VFINX is 0.14%, and other index funds go as low as 0.04%.

As for performance, over 15 years this fund paid an average 7.20% rate of return. VFINX paid 8.50%. A lot of that is loads and expense ratio.

(The C-class did even worse, only 6.35% over 15 years. That loss of 0.85% is nearly the difference in expense ratios, showing that yeah, expense ratios diminish your returns).

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  • Even active pickers of large-ish funds tend to end up overlapping with the index an awful lot. – stannius Apr 16 '19 at 22:11

401(k) plans can vary pretty widely in quality. The primary consideration is cost.

There are two aspects to the cost. One is which funds are offered in the plan. Index funds are good because they are cheap; actively managed funds are not as good because they tend not to be cheap. Some plans have a lot of funds available, but I would rather have a small number of funds available if they are all index funds. Hopefully there is at least one broad stock market index fund on the list; if not, it is a bad plan.

The second aspect of the cost is whether the costs of administering the plan are paid by the employer or the employees. It can be hard to tell if the employees are being charged and if so, how much. Sometimes the administration costs are explicitly stated, e.g. $10 per quarter. Other times they hide it by making the offerings "wrap funds" around the real investments. I have seen wrap funds with 0.35% additional expense ratio, and I have seen them with well over 1% expense ratio. Lower is better, obviously, with the ideal being zero (the employer covers all the costs).

There is also the aspect of whether the plan offers a match or not, but that is up to the employer and doesn't affect a decision whether to roll into the plan.

It is uncommon for a 401(k) plan to be good enough to be worth rolling into. It's a safer bet to roll the money into an IRA at a reputable discount brokerage, and invest it in broad-market index funds or a target date fund.

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