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I'm still a student (2 more semesters), but recently completed an internship with GoodCompany that provided me a 401(k) matching plan. While I have about $1200 in it, I'm only vested in my contributions - 50% of the funds (I would need 3 years of employment to fully vest). While not impossible, it is unlikely I would return to work for GoodCompany in the future (far from family, mediocre pay).

Unfortunately, the 401(k) is losing money due to quarterly fees (fees are greater than earnings, taken from my 50%), so I want to pull my money out and into some private retirement fund. My parents say I should just pull the money out as cash, since "[I'm] still a student and shouldn't focus on retirement yet". Touching any of it will cause me to forfeit my un-vested amount, as will leaving it untouched for the next 5 years.

Is there any reasons to leave the money in the 401(k) (or have a defunct 401(k) in general) other than the possibility of the company's $600 in the future (eg. tax break)? Is there any penalty to touching 401k's?

If it makes a difference, the 401(k) is at Fidelity, and I already have a small taxable investment account with Betterment, and I want to move the funds to a Betterment IRA.

  • It's hard to believe that the fees would be higher than the earnings in today's market. Fidelity has many low fee options. Are you sure you're interpreting the fee schedule correctly? – TTT Sep 2 '18 at 11:51
  • Did you make your contributions pre-tax or Roth? and is the Betterment IRA traditional or Roth? – mhoran_psprep Sep 2 '18 at 12:23
  • Sorry to have forgotten about this, but moving back to school distracted me a bit. @TTT, there are flat maintenance fees that are greater than the return on my half. – Michael Sep 18 '18 at 16:48
  • @mhoran_psprep, I made the 401k contributions pretax, and betterment lets you move a 401k into their system as a IRA, keeping it tax advantaged. – Michael Sep 18 '18 at 16:48
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If you're not going to work for that company in the future, the unvested balance is already lost to you. Don't listen to scare words about "you'll lose 50% of your balance"... that 50% is not yours, never was, and never will be.

When you switch jobs, rolling over into an IRA is almost always the right thing to do. There are exceptions... some very large 401(k) plans have negotiated lower fees than you can find on the public market, and legal protections for 401(k) plans extend across the country, while most IRA protections are state-specific. But the increased level of control usually translates into lower costs, and having control is desirable in its own right.

Don't make the mistake of pulling the funds out as cash, though. You want a direct rollover. If you pull the money out, some gets withheld, and to avoid tax+penalty you have to deposit the original amount (before withholding) into the new plan. Much better to arrange a trustee-to-trustee transfer.

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Generally, 401(k) is known to have limited investment options. However, is it really that bad?

My 401(k) is at Fidelity too. This of course varies by employer, and in my case, there are 24 choices available, most of them having fees in the 0.6-0.8% range. This is high, but even in this worst case, are you sure you're reading that correctly that "fees are greater than earnings"?

On to a brighter side, there are few investment options available in my 401(k) with expense ratio below 0.1%. One is institutional shares (with waived minimum investment) of a passively managed S&P 500 fund with an amazing 0.015% expense ratio. That's where most of my contributions go.

Thus my advice is to go over the investment options made available under your 401(k), and check their expense ratios. There is a fair chance that there are some decent ones with low ER. You could then move your money there, which comes with no fees, penalties, or tax implications. This looks like a better alternative than losing 50% of your money.

On a side note, since you've mentioned you have taxable investment account - you could consider having that as Roth IRA instead, which is tax-advantaged, and has no contributions withdrawal penalty.

  • He doesn't get the other 50% by leaving the account open and paying fees. He has to go back to work there after graduation to get it. $600 is not a large enough sum to sway choice of employers. – Ben Voigt Sep 2 '18 at 17:25

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