The hidden costs of keeping a retirement plan with a former employer.
Up until recently I had two old 401(k) plans from former jobs, one that I haven’t contributed to since leaving the company 10 years ago. I used to have three such dormant accounts, but then I started having anxiety dreams about “losing” one of them—I felt like someone who had too many children to keep track of at an amusement park. So I converted the 401(k) account from my first job into a Roth IRA long ago.
As for the other two accounts, I had kept them in place because I liked the investment options, they performed well, and there seemed to be no reason to do otherwise. In fact, I was always a bit wary of the rollover marketing letters that would arrive after leaving a job—suspicious that if I left the corporate plan, with its bargaining power, I would fall prey to higher fees. And I felt kind of savvy knowing that I didn’t have to rollover.
It turns out that sense of savvy was actually semi-informed inertia. Yes, it’s true that no-load and low-fee funds have now become standard at all the IRA platforms, thanks in part to a fierce rivalry between Fidelity and Vanguard, the top 401(k) providers. But companies have actually become less generous about continuing to house former employees in their employee-sponsored 401(k)s and have begun passing on administration fees.
And yet people are still a bit more likely to leave their money in plans with their former employers than they are to rollover, according to a survey of job changers over 50 published last month by the Employee Benefit Research Institute. More than 27% left money in their old 401(k)s vs 25% who rolled over. Only 0.5% transferred the money to a new employer’s plan—but I don’t have that option as I’m freelancing at the moment. (Some 26% elected to start receiving benefits since they were retiring, and 17% withdrew the money, which, in case you don’t know, is a VERY BAD IDEA.)
You might be very surprised to learn that you may be paying administration fees for the record-keeping and custody of your dormant plans on top of the costs of the underlying investments. I certainly was. As soon as I got that tip-off, which I found in an investing book, I quickly called the retirement benefits offices for my two dormant accounts to find out if I was being charged.
The first, a large media company, acknowledged that it cost me $42 dollars a year for the privilege of keeping my money in the account that they sponsor through Fidelity, whereas I could roll over that money into a Fidelity IRA invested in the exact same funds with no administration charges. That $42 was a stealth fee (or at least, I hadn’t noticed it), and while not large, it deeply offended my sense of transparency and disclosure.
Can you guess whom I called next? 1-800-FIDELITY. It only took a few minutes to arrange for the rollover. The money was available in a few days to invest, at which point I created a similar portfolio, with some rebalancing between domestic and international equity funds, which was probably a good idea anyway.
The second company, also a large media conglomerate, told me that there are custodial costs for administering their plan through T. Rowe Price but that I was not being billed for them. My hunch is this company, being privately owned, has not been under quite as much pressure to cut benefits costs. Or perhaps it’s because I signed up for the plan in 1998, and as such I have been grandfathered into a more generous version. I’m leaving that 401(k) in place for now. There’s no way of really knowing why one employer bills dormant account holders and another doesn’t, but I have a feeling that I won’t have many more jobs where they won’t.
Ruth Davis Konigsberg, a fortysomething journalist and consultant to Arden Asset Management, writes weekly about retirement planning.