A Job-Switch Misstep That Can Cost You Thousands

Carla Fried

When you leave a job you could also be leaving behind tens of thousands of dollars.

I’m guessing that’s not a mistake you can’t afford. The good news is it’s incredibly easy to make sure you don’t fall into what I call the 401(k) inertia trap.

Here’s the deal: when you leave a job-whether it’s voluntary or not-you have the freedom to leave your 401(k) with you old employer’s plan (as long as you have $5,000 in the account), or you can move the 401(k) to your own investment account, what is called an IRA rollover.

Why Rollovers Rock

In most instances you should do the 401(k) rollover. When you are invested in a 401(k) at work you are limited to the investment choices offered in that plan. Now if you have a super-enlightened company that offers a terrific lineup of low-cost index funds, you might have an argument for staying put. But if your plan isn’t so cost-conscious, roll over the money and you have the freedom to invest in just about any low cost index mutual fund, exchange-traded fund (ETF), as well as any individual stocks or bonds. That gives you total control over costs, and make no mistake, low costs are a huge factor in your retirement planning success.

Let’s say you currently have $50,000 in a  401(k) at an old employer  and the average expense ratio of the funds you’re invested in is 1 percent. If your gross average annual return (before expenses) is 7 percent over the next 25 years,  your net 6 percent return after accounting for the one percent annual expense charge would result in an account balance of nearly $215,000. Not bad, right? But let’s say that you instead decide to do the rollover and you invest your accounts in lower-cost funds and ETFs with an average expense charge of just 0.50 percent.  Assuming the same gross return of 7 percent, your net (after-expense) return is 6.5 percent. Chump change of a difference? Think again. You would have more than $241,000 in 25 years. That’s an extra $26,000, or half of your current balance simply because you paid attention to fees.

And your savings could be even more. Let’s say your current 401(k) funds charge you an average 1.2 percent in annual expenses. And then let’s also assume you become a fee fiend and do a rollover and focus on ETFs and index funds with super low expense ratios of 0.30 percent or less (yep, plenty are that low.)  Your potential extra earnings by getting out of the expensive 401(k) and into your low-cost IRA Rollover portfolio could be $50,000. Having an extra $50,000 come retirement sounds like a pretty good move to me. Isn’t it time to rollover your old 401(k)s?