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Let's say I start up my 401(k) through my employer with a particular fund.

Take this for example:

Largest Holdings (08/31/2013)

Apple 3.07%

Exxon Mobil Corporation 2.60%

Microsoft 1.68%

And so on.

Now 5 years pass and tech changes so pretend I don't want to carry Microsoft anymore but the Fund Manager still has it as one of the largest holdings. Hence I want out of this fund. I know with a 401(k) I can switch which fund my contribution goes too but if I understand correctly I'll still have my existing shares of this Mutual Fund. Is there instead a way to sell this fund and move all of the assets into a different one, all within the 401(k) area?

For the record this is just an example. I do not have any 401(k) yet and am just trying to prepare myself before I begin one to make sure I either pick funds that I think will last until retirement or know how to exit safely, early.

  • Also once you actually get your 401k set up you can probably get help from the HR people in your company, hopefully. – grayQuant Jan 28 '14 at 4:43
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One of the strengths of 401K accounts is that you can move from investment X in the program to investment Y in the program without tax consequences. As you move through your lifetime you will tend to want to lower risk by investing in funds that are less aggressive.

The only way this works is if there is an ability to move funds. If there were only one or two funds to pick from or that you were locked in to your initial choices that would be a very poor 401K to be enrolled in.

On your benefits/401K website you should be able to adjust three sets of numbers:

  • Where your new money goes.
  • Where the company match goes
  • Where your current money goes.

Some have you enter the current money as a percentage others allow you to enter it in dollars. They might limit the number of changes you can do in a month to the current money balances to avoid the temptation to try and time the market. These changes usually happen within 1 business day.

Regarding new and match money they could limit the lowest non zero percent to 5% or 10%, but they might allow numbers as low as 1%. These changes take place generally with the next paycheck.

  • I have never been able to manage my company match separately (though I have only had 2 401(k)s), but the rest of this is accurate. – Craig W Jan 27 '14 at 15:07
  • I have worked for 4 companies (but had 8 different 401 K programs), the last three let me pick the matching destination. The first two had all the matching go to company stock, but that was pre-Enron. – mhoran_psprep Jan 27 '14 at 15:43
  • I should clarify. In my current 401(k) I manage all of my money as a whole, and my company match is distributed just like my contributions. Perhaps that is what you meant. In my previous 401(k) back in 2007-8, I believe the match all went into company stock. – Craig W Jan 27 '14 at 18:25
  • @CraigW I believe it is now illegal to force employees buy the company stock in 401k with vested funds. – littleadv Jan 28 '14 at 4:18
  • @littleadv Interesting! – Craig W Jan 28 '14 at 8:15
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Most 401k plans (maybe even all 401k plans as a matter of law) allow the option of moving the money in your 401k account from one mutual fund to another (within the group of funds that are in the plan). So, you can exit from one fund and put all your 401k money (not just the new contributions) into another fund in the group if you like. Whether you can find a fund within that group that invests only in the companies that you approve of is another matter.

As mhoran_psprep's answer points out, changing investments inside a 401k (ditto IRAs, 403b and 457 plans) is without tax consequence which is not the case when you sell one mutual fund and buy another in a non-retirement account.

  • Do you know what that law you mention is? Or even what technique this is called so I can look up more information about it? – Ender Jan 27 '14 at 14:46
  • The law would be some section of the Internal Revenue Code that was established by some Act of Congress. You should look up 401k plans on the IRS web site if you want citation of chapter and verse. In all the 401k plans (and 403b plans and 457 plans) that I have encountered, all it takes is to go to the 401k plan website and click a few buttons and enter a few numbers; no different from changing from one mutual fund to another on your IRA account web site (for IRAs from mutual fund companies such as Vanguard or Fidelity; might be different for IRAs in brokerage accounts). – Dilip Sarwate Jan 27 '14 at 14:52
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    @Ryan The law would, not surprisingly, be the IRC (title 26) section 401 subsection k (hence 401k). The technique is called rebalancing. – littleadv Jan 27 '14 at 19:25
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The S&P top 5 -

  1. Apple 3.05%
  2. Exxon 2.67%
  3. Google 1.90%
  4. Microsoft 1.71%
  5. GE 1.71%

401(k) usually comply with the DOL's suggestion to offer at least three distinct investment options with substantially different risk/return objectives. Typically a short term bond fund. Short term is a year or less and it will rarely have a negative year. A large cap fund, often the S&P index. A balanced fund, offering a mix. Last, the company's stock. This is a great way to put all your eggs in one basket, and when the company goes under, you have no job and no savings.

My concern about your Microsoft remark is that you might not have the choice to manage you funds with such granularity. Will you get out of the S&P fund because you think this one stock or even one sector of the S&P is overvalued? And buy into what? The bond fund? If you have the skill to choose individual stocks, and the 401(k) doesn't offer a brokerage window (to trade on your own) then just invest your money outside the 401(k). But. If they offer a matching deposit, don't ignore that.

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