2

After many years contribution, my previous employment's 401K account has more than 500K now. I don't like its plans which have less returns comparing with plans from other broker companies.

I am self-employed right now. My new 401K account is in Fidelity with much better mutual funds. I was thinking rollover to Fidelity but I am worrying about put all eggs into one basket may hurt myself one day.

what will you do if you were I? Should I open an 401K account in Vanguad for this purpose?

  • I suppose the reality is, that the (ROFL LOL ROFLMAO - someone help me up now :) ) government "protection" is USD 500,000 - right? So I mean - yeah, a very prudent person would stop each one at say 300-400k. I guess. (I wouldn't be at all surprised if there's actually some fine print, that the gov. consolidates all your accounts, and only gives you 500k, when their paper money gives out.) – Fattie Jan 30 '18 at 2:24
4

I am worrying about put all eggs into one basket may hurt myself one day.

I wouldn't worry about having all of your funds in a single brokerage account. Putting all of your funds into a single stock would be akin to all your eggs in one basket, and some people might argue that even putting all your eggs into a single fund would be similar. (Note though that Fidelity has retirement-year based funds which are actually setup to include many other funds, even though from your point of view it looks like just one fund.)

Given that you've already decided to move your old 401k, your options should be limited to rolling it into your new Fidelity 401k, or roll it into an IRA (somewhere). If you like the Vanguard fund options more than Fidelity, then feel free to open an IRA with them and move your old 401k into that, but I wouldn't open another 401k. Typically 401k fees are slightly higher than IRA fees. But again, I don't think there's any reason to have multiple brokerage firms unless you really like something about that firm. It's not like Fidelity or Vanguard is going to somehow lose your money...

If you are super paranoid that somehow Fidelity (or Vanguard) could go bankrupt, there is some federal protection (SIPC) up to $500K per account type, so you could split up all of your accounts such that they have less than $500K per account. (Traditional IRA, Roth IRA, etc.) Once you've hit the number of accounts that makes sense you could use another brokerage account simply to increase that limit. Note that 401k accounts are typically not covered by the SIPC because they don't need to be: they are held in trust and can't be spent the same way other account types could be. For example, here's Fidelity's account protection policy.

  • 401K is not covered by SIPC but Traditional IRA does? Then rollover to IRA is better? – peterboston Jan 29 '18 at 18:07
  • "Typically 401k fees are slightly higher than IRA fees" -- how can I find this difference? I have both accounts in Fidelity but never notice the difference. – peterboston Jan 29 '18 at 18:08
  • @peterboston I just added a link to Fidelity's protection policy. All 3 are interesting to read, and 401k is covered in the third category called "Other Types of Protection". IMHO 401K is slightly better from a protection standpoint because it is fully protected beyond 500K. But if the fees turn out to be higher in the 401k, I'd probably lean towards an IRA. – TTT Jan 29 '18 at 20:31
  • @peterboston regarding fee comparison, it really depends. Many companies have slightly higher fees for their 401k because they bake in investment advice and other fees, but this varies by company. Perhaps you can look at identical funds in your 401K and those you can invest in your IRA and compare. Though I assume you being self employed didn't decide to increase your fees, so maybe they're identical... :D – TTT Jan 29 '18 at 20:41
  • Second rolling into a Vanguard IRA. Personally, I like their funds better than Fidelity. At your current value, you'd qualify for $2 trade commissions if you do brokerage with Vanguard, also. Not sure what the Fidelity commission is over $500k assets, but it's probably similar. – grfrazee Jun 26 '18 at 17:46
1

You are much more likely to struggle with book-keeping and making poor investment decisions with two accounts. Better to put it all in one brokerage account where you can make comprehensive decisions.

If Fidelity or Vanguard goes bankrupt, the United States is in a lot more trouble then simply losing your retirement accounts. So either company makes investing and spending retirement savings pretty much no risk.

  • 2
    Are they really "too big to fail"? I have also seen big guys failed before though. – peterboston Jan 29 '18 at 18:11
1

MyMoneyBlog has a post precisely on that topic: http://www.mymoneyblog.com/exceeding-sipc-insurance-limits.html (mirror). Excerpts:

How often has SIPC insurance actually been exceeded? Only in less than 0.1% of claims. Here are some stats from a Betterment article based on the SIPC 2014 annual report [pdf]:

Since the inception of SIPC in 1971, fewer than 1% of all SIPC member broker-dealers have been subject to a SIPC insolvency proceeding. During those proceedings, 99% of total assets distributed to investors came directly from the insolvent broker-dealer’s assets, and not from SIPC. Of all the claims ever filed (625,200), less than one-tenth of a percent (352) exceeded the limit of coverage.

Example of meeting and/or exceeding SIPC limits. So for example, you could have $2 million of non-cash assets at a failed firm in a single taxable account. If 75% of assets are recovered from the failed firm, you get $1.5 million back from the firm and $500,000 from the SIPC. If only 50% of the assets are recovered, that’s $1 million back from the firm, $500,000 from SIPC, and you’d be out $500,000 unless there are additional recoveries in the future.

Again, a recovery rate as low as 50% is highly unlikely based on historical failures. Per the SIPC annual report, the average recovery rate for insolvencies is 99%. Most examples that I’ve seen use a 90% recovery rate as a conservative example.

[…]

My two cents. Purely my opinion, but this is how I see it:

  • Keeping your accounts to each stay under the $500,000 limit (and not hold cash in excess of $250,000) is the only way to know that you’ll be 100% covered in the cases listed above. Just because something hasn’t happened in the past, doesn’t mean it won’t happen. Unlikely is not impossible.

  • If your account has between $500,000 and $5,000,000 in it, and you’re holding traditional mutual fund or ETFs inside, you’d need a bankrupt firm with less than a 90% recovery rate to lose any money (possibly much less). That is admittedly quite rare. You will have to weigh the risk against the added hassle of splitting your accounts by either institution or legal entity.

  • If you have more than $5,000,000 at a single account type at one broker-dealer, I think it starts to definitely become worth the extra effort to split your assets by either institution or legal entity. The risk may be small, but the potential losses are big. If you have this much, why mess around?

  • I wouldn’t put too much faith into excess SIPC insurance. They usually come with an aggregate limit and you have no idea how close the firm’s current assets are to exceeding that value. The amount of protection you’d receive is not under your control.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .