Funds, Banker or Broker - who takes better care of my nest egg

January 12, 2010 1:29 PM

I got laid off, have a 401k (in Fidelity right now) with $100k+ and want to roll it over into an IRA. I would consiter a Roth IRA if I get lucky and find a job this year because of low income so far and spreading taxes over two years. I read here about the following IRA options: Just put it into a bank...limited options and fees Put it into a self-directed IRA account with Fidelity for instance. Find a broker who will help pick investments.

Now I admit I can't pick investments. I had kept my money in the fidelity freedom fund for its automatic allocation. HOWEVER, that might not be the best way to build value.

My question focuses mostly on broker directed IRAs:
What should I look for in a broker? Insurances, certifications, fees, etc.?
A broker will doubtless promise higher returns and guarantee higher fees :). But would he be worth it?
What kind of insurace does a broker have for IRAs? Independant audits? I am looking to avoid a Bernie Madoff here....
What about other perks?
IE:
Borrow against the acct? (possible with 401k but not IRAs as far as I can see ... but brokers are clever after all)
I was intrigued to see that owning one share of Berkshire would get your discounts ... why not have one in an IRA and get them (if possible).
Cheaper/free services (like a bank giving you a low interest credit card due to high balances in ALL accounts)
Free travel, internet, cell phone, foot massages, etc. (comeon, I don't know what is out there so let me know what you might have heard about)
Does it matter if I leave Colorado and move to California?

I got, I hope, another 20 years of work in a good job (but I'm kinda old for people to actually hire as a programmer so it sure feels like I'll be lucky to get a job as an auto parts store salesman).

posted by CodeMonkey to Work & Money (16 answers total)

Can you talk about why you want to a managed fund? Most brokers don't beat the market, which is part of why most personal finance experts recommend index funds.
posted by decathecting at 1:59 PM on January 12, 2010

I'm pretty sure you can't put this in a Roth. You'd need to put it into a Rollover IRA.

If you are not comfortable picking your own investments, either go with an index fund or go to a full-service brokerage (eg ML, UBS, etc) and have a broker help you pick them.
posted by charlesv at 2:06 PM on January 12, 2010

It is my understanding that to roll your 401k into an IRA, you must stick with the same type of account you already have. That is to say, if you have a tax-deferred (traditional) 401k, you have to roll it over to a traditional IRA. If you have a Roth 401k, you have to roll it over to a Roth IRA.

You are right that you cannot take a loan against an IRA, but you can against a 401k. Don't think a broker is going to change this.

Get thee to Vanguard.
posted by jckll at 2:13 PM on January 12, 2010

You could convert some of the money to a Roth after doing the rollover to a standard IRA, but you would have to pay income taxes on the amount you do convert. (That is why the government is being so generous about the option right now. And you thought it was to help you out.)
posted by megatherium at 2:21 PM on January 12, 2010

Right, sorry, I didn't mention that. You can of course convert from tax-deferred (traditional) to post-tax (Roth) any time if you are prepared to pay the tax at the point of conversion. But for most people that defeats the purpose of the tax-deferred investment in the first place.
posted by jckll at 2:22 PM on January 12, 2010

As others have said, converting from 401k to Roth IRA is a two step process. I don't have experience with other brokers, but Vanguard will pretty much take care of all of it for you. You sign a couple of papers, but that's it. They also have very cheap retirement funds that have portfolios diversified for retirement dates (i.e. if you want to retire in 40 years, you're going to want a different mix of stocks and bonds than if you want to retire in 5 years). It's cheap, it's easy, and by design it's a very good balance of risk and return.
posted by one_bean at 2:54 PM on January 12, 2010 [1 favorite]

Best answer: Another valid choice is to leave your money where it is, but moving it to an IRA at a discount broker will almost certainly reduce your fees, so I think you are making the right choice. I would also make a point of continuing to contribute to your IRA as much as possible on an ongoing basis, especially when the market is down.

As far as Roth vs. traditional, the Roth has the following good points:

• You can contribute "more" to it than to a traditional IRA because it's post-tax. (The annual contribution limit for a Roth IRA is the same as for a traditional IRA, but because they're post-tax dollars, they're worth more.)
• You can take out your contributions at any time without tax or penalty, because you already paid tax on them. This makes it a good secondary emergency fund. (Since you may have it invested in securities that may have declined in value since you bought them, it is definitely secondary to your main savings.) This can be better than borrowing against it!
• You can still contribute to a Roth even if you are in a 401(k) at work. They phase out the contribution tax advantage if you make more than $55,000 (if single). You can still contribute to a traditional IRA, but since your contribution is not tax-deductible, why bother? A Roth is far better.

Remember, a Roth IRA is still tax-advantaged even though it's not tax-deferred. Converting from traditional to Roth doesn't "defeat the purpose" -- it's actually a good idea if you expect to have a higher tax rate at retirement than you do now. (It comes out even if the rates are the same.) Given that taxes almost always go up, and especially if you are having low income, this may be a good bet.

As to what to do with the money once you get it out of your 401(k), I suggest putting it into a discount brokerage account, such as Schwab, Fidelity, Vanguard, or (my favorite) Wells Fargo (yes, they have a brokerage as well as a bank). The reason I like Wells Fargo is that they give you 100 market trades a year for free if you have at least $25,000 in accounts or loans with them. Not 100 free trades, but 100 free trades each year. Since you should not be buying or selling frequently, this means you will never pay fees.

Do not buy investments recommended by a broker. They make money each time you place an order, not when you make money. And they never lose money. Their incentive is to get you to make as many trades as possible, regardless of those trades. There are undoubtedly some brokers who pick good investments, but you can do as well yourself, or just invest in the whole market.

The reason I suggest a brokerage account is it gives you maximum flexibility. If you want to put your money into a money market fund that will probably not lose value (although it is not FDIC insured like a bank) you can do that. If you want to invest in the whole market you can do that. If you want to buy aggressive growth funds or value funds or any other style of managed fund you can do that. If you want to buy individual stocks or bonds and run your own portfolio you can do that. If you want a "target retirement" fund (where they manage the mix of iinvestments based on when you want to retire) you can do that.

Once you have a brokerage account, I would suggest looking at exchange-traded funds, which are mutual funds that trade on the stock market. Specifically, I would seek low-fee, broad-market index funds, such as VTI (Vanguard's world stock market index fund). Note that VTI is an example -- I am not suggesting that you invest in any specific security, since I do not know your financial situations.

BTW, owning shares of Berkshire Hathaway will indeed get you discounts at many of their businesses. They are not a bad stock to own, either, and look a bit beaten down from their highs. I would suggest the B shares, even though you can afford an A share, since when you need a few grand, it is nice to be able to sell just a little instead of having to liquidate your whole position. However, since you will own the stock through a broker, you will tell them you own the stock in "street name" (i.e. the shares are not in your name but your broker's). Berkshire has no way of verifying your ownership when the shares are in your broker's name, so they will take your word for it. That means that, as far as I can tell, you don't actually have to have any shares to get the discounts. (Not that I would recommend this practice!)
posted by kindall at 3:11 PM on January 12, 2010 [2 favorites]

The Fidelity freedom funds I looked at have an expense ratio of .74%. This means you are spending $740 per year for them to invest your $100,000 and manage your allocation. This is not a bad choice and is a lot less than paying a broker. I agree with decathecting, don't bother with managed funds.

If you want to manage the allocation yourself you can probably save at least $500/yr by purchasing exchange traded funds. These typically have expense ratios under .1%.

Bottom line, you should probably open an IRA account with Fidelity (or Vanguard or Schwab) and roll it over to the freedom fund or the equivalent. Then, if you want, learn about ETFs and asset allocation and take it over yourself.

Roth conversion is a whole other topic that I'm learning about myself. Can't help you there.

Also, I use Schwab and have been happy with them. They may have an office near you. If so, you can walk in and they'll talk to you about this for free.
posted by cosmac at 3:12 PM on January 12, 2010

Oh, yes, you also asked about nsurance. Brokers carry insurance from SIPC, which basically means that if the broker goes bankrupt you get to keep your shares and any cash in your account. It does not guarantee that your investments will not retain their value. They can't guarantee that. If you can't stomach that, then put your money in a bank, but remember that you will not even beat inflation that way. You gotta take the risk to reap the rewards.

That said, there are a number of investment strategies you can use to reduce specific risks. However, most of these strategies cannot be used in retirement accounts. If you buy invest in stocks, you should get used to the idea that your investments will decline in value from time to time, and try to look at these occasions primarily as opportunities to buy more.
posted by kindall at 3:18 PM on January 12, 2010

kindall: "I would suggest the B shares, even though you can afford an A share"

Actually, I'd hold off on that for a bit. It appears Berkshire is considering splitting the B's 50:1. The end result would be that it's easier to tune your holdings of BRK-B to a finer dollar resolution, so to speak, in a single order rather than one now and one after the split. Though the split itself might change the market value if it gets listed in wildly popular stock indexes.

I'm not sure what this means for the shareholder perks, since a GEICO discount of eight percent on my insurance would easily cover the cost of a single share in two years, and leave me with an saleable asset. Does anyone reading actually own Berkshire in street name and claim any discounts (or attend meetings?)
posted by pwnguin at 4:53 PM on January 12, 2010

Direct rollovers from 401ks to Roths have been allowed since 2008 as far as I know.

Converting to a Roth does NOT miss the point of why you did tax deferred in the first place. They are apples and oranges. Roths are the bomb for most people (but not for everyone!)

There are lots of good reasons to pay someone to manage your portfolio (examples: you don't have the time, ability, or stomach for it.) If you decide to manage your own account, find a fee-only financial planner. Pay for an hour of their time to look things over. You can also pay them to pick some things out for you then look over your accounts once a quarter or once a year for reassurance that things are still appropriately allocated and that there isn't anything alarmingly weird going on.

The most obvious way to avoid Madoffs is to make sure your advisor/broker (if you go that route instead of doing it yourself) uses a custodian. Madoff got away with what he did because he wrote up his own statements. There was no Fidelity/Schwab/Merrill etc to check his numbers against.

I have had good experiences with both Fidelity and Schwab. I've had bad experiences with Vanguard's customer service. I haven't tried any other platforms that cater to people doing their own investing so I can't speak to their user friendliness. Vanguard's main advantage is that they're cheap (and to my suspicious mind that just means they've just buried their fees in their mutual funds, which don't have to disclose most of their fees- just their loads and expense ratios. I could be wrong about Vanguard's fees but I'm suspicious of funds that have expense ratios that are THAT low.)

Getting allocation advice from people on the internet who know nothing about you is a bad idea.

Repeat: Getting allocation advice from people on the internet who know nothing about you is a bad idea.
posted by small_ruminant at 5:09 PM on January 12, 2010

It generally is a good idea to take advantage of a job change to rollover a 401k to an IRA. This means the money will be under your control and not subject to the limited investments and fees of the 401k plan.

For the discussion below I will assume that all of the money in your 401k is tax-deferred contributions and company match, which is the most common case. It is rarer to have pre-tax contributions and the rules can be somewhat more complex.

You could roll the 401k into a traditional IRA. In this case you would owe no taxes.

After rolling into the traditional IRA, you could optionally convert it to a Roth IRA, even the next day if you like. You would have to pay taxes on the conversion. The taxes might be $15,000 to $25,000 depending on your tax bracket. You should not do the conversion unless you can pay the taxes from other cash you have available. It generally does not make sense to do the conversion if you have to use part of your IRA rollover to pay the taxes.

By new rules since 2006, you can do a direct conversion in one step from your 401k to your Roth IRA, but again you need to pay the taxes on the conversion.

The two step method may allow you more flexibility because you can do the rollover now to a traditional IRA and wait until later in the year after determining your tax situation to decide on the Roth conversion.

This year, 2010, is a special case and you can choose to spread the taxes for the conversion over two years. You need to be careful because once you select the two year option, you must pay the second half on your 2011 taxes even if your income and tax rate have increased. In your case you know that you will be unemployed at least part of 2010 and likely have a lower income, but you don't know about 2011. So you have to decide whether to exercise the two year option or not.

One advantage of the the Roth conversion is that you can withdraw the converted amount without penalty for an emergency after a waiting period of five years. This is not recommended but it does give you penalty-free access to your money sooner than a traditional IRA that requires you to wait until age 59 1/2.

As for what to do with the IRA, I would not recommend putting it in a brokerage account or seeking the advice of a broker. Put your IRA in a mutual fund company, either Fidelity or Vanguard. I prefer Vanguard because of its generally lower expenses.

Since you say you do not have investment skills, I would recommend either a Fidelity Freedom Fund or the Vanguard Target Retirement Fund. A single fund provides a complete well-diversified portfolio for most investors. There is no guarantee than any investment advisor can do better and there is a good chance they will do worse.
posted by JackFlash at 6:47 PM on January 12, 2010

I would second the recommendations to call Vanguard, get yourself a Rollover IRA, and pop the funds in a target date retirement fund appropriate for your age. They'll help you every step of the way. The costs should be low because their fund expenses are low, and with your assets or online statement delivery there are no account fees.

That's just step one, though.

Step two is to get educated about investing.
Check out bogleheads.org, they'll help you with asset allocation. The target date funds are decent, but you can probably do better. I also like the Sound Investing Podcast @ fundadvice.com a lot.

To address your questions about brokers.. If you stick to a large national company offering publicly traded mutual funds, you'll avoid a Madoff situation. As far as perks, remember -- there's no such thing as a free lunch. And lastly, where you live doesn't really matter.

Good luck!
posted by herrtodd at 9:07 PM on January 12, 2010

Yes, get yourself to Vanguard and put your money into index funds. Read this and you'll know why index funds are the way to go. As far as the Roth is concerned, it is my understanding that you can only put around 4-5k a year into the Roth.
posted by jasondigitized at 4:52 AM on January 13, 2010

I have shares in Berkshire Hathaway and didn't even know I could get discounts on stuff. What's the deal on that?
posted by jasondigitized at 4:58 AM on January 13, 2010

I know GEICO offers a 7% discount for BRK shareholders and I believe many Berkshire companies also offer a discount, you just have to tell them you're a shareholder and ask for the discount.
posted by kindall at 8:21 AM on January 14, 2010