Rollover a 401K for a 25 yr old?

January 30, 2022 9:21 AM

My daughter recently left a big retailer and has a 401k with about $2k in it. She wants to get out of the company plan because she hates the place and wants to leave it all behind. She wants me to help find a rollover account. There's no plan where she currently works.

Relevant facts:
1) She wants to set it and forget it. I have extolled the wonders of compound interest enough that she sees that this relatively small amount may be really key in 40 years but for now she'd rather ignore it.
2) She has a sizeable hunk of student debt and is currently back in school so will not be in a place of adding to this for the foreseeable future.
3) Ethically minded fund would be prefereable.

I don't have any investments and haven't paid enough attention to this to steer her in the right direction. Thanks for any insight!

posted by readery to Work & Money (12 answers total)

She can roll it over to an IRA at Fidelity.
posted by janell at 9:28 AM on January 30, 2022 [5 favorites]

seconding an IRA.
posted by Old Kentucky Shark at 9:41 AM on January 30, 2022 [1 favorite]

She can roll it over into an IRA anywhere she pleases. I used Vanguard for this and it was fine. Fidelity is probably fine too.
posted by number9dream at 9:47 AM on January 30, 2022 [9 favorites]

Yep. Roll it over into an IRA (e.g. Fidelity). I've done this and it's pretty easy, but there's a process. Here is where to get started.
posted by johnxlibris at 9:47 AM on January 30, 2022

Vanguard is another good option.
posted by sriracha at 9:47 AM on January 30, 2022 [8 favorites]

Nthing Vanguard. They make it easy to roll it over.
posted by BlahLaLa at 9:49 AM on January 30, 2022 [5 favorites]

Best to roll over to a low-fee brokerage IRA (especially since the amounts are low). Just make sure that the IRA is of the same "kind". I presume her 401k is a "traditional" (meaning that the money put in there is pre-tax) IRA. If so, roll it over to a "traditional" IRA. If the money is in a Roth (meaning post-tax money) 401k then make sure it rolls over to a Roth IRA. Another thing to consider is to make sure it is a rollover (meaning that the money goes directly from the current custodian to the new one). She should be careful to ensure that the money does not go via her, but directly from one custodian to another. For rollovers, contact the new custodian and give them the details. They will do the transfer once you give them the authorization.

I would recommend Vanguard as the brokerage- very low fees. They do have a social fund, Vanguard FTSE Social Index Fund Admiral Shares (VFTAX), if that is what you prefer.
posted by dorab at 9:54 AM on January 30, 2022 [5 favorites]

Echoing the other answers that she should just roll it over to an IRA. Vanguard, Fidelity, or Schwab are all fine. (The optimal route is to roll it over to a new employer's 401k, which leaves your traditional IRA balances empty to optimize backdoor Roth contributions, but as you say that she's going back to school, that won't be an option.)

I would also add to that she absolutely needs to confirm, post-rollover, that the IRA balance is invested in something, and not merely sitting in a money market fund. Too many folks have missed out on years of gains by not ensuring that their balances are actually invested.
posted by un petit cadeau at 10:19 AM on January 30, 2022 [2 favorites]

This question is not entirely well-formed. There are two considerations to the rollover and I'm not sure which one to use:

• Which brokerage? A brokerage is a company that hosts the IRA account. Typical brokerages are Fidelity, Vanguard, Charles Schwab, M1 Finance, and so forth. You probably want a "low-cost brokerage" - one that charges no fees to host the account. Otherwise, with an account with $2K in it, fees will slowly eat up the entirety of the account. Vanguard hosts my IRA, and they have very specific information on how to avoid an annual fee. Think of the brokerage as the "garage" for the investments your daughter makes.
• Which investments? Many brokerages offer their own investment funds (ie, Fidelity offers Fidelity funds, Vanguard offers Vanguard funds) - but most all investments are available at all brokerages. For example, I hold Vanguard index funds in my Fidelity 401(k) account. Sometimes there will be additional fees for buying funds from other brokerages, so many people use their brokerage's fund selection. However, it's not required.

For the first question - which brokerage - I like Vanguard for new investors. I don't think there's much of a distinction though. All of the brokerages I list above offer no-fee IRA accounts that are easy to set up. So, I don't think it really matters that much.

For the second question - which investments - you should figure out what "ethical" means to you. The commonly used term here is "ESG" funds - environmental/social/governance funds. These tend to invest in companies that have minimal (or positive) environmental impact, do not contribute to corrupt governments and human rights violations, and have transparent corporate administration. However, there are two prominent issues that I have with ESG funds:

• The definition of a "good" company may not match yours. For instance, most ESG funds will not invest in nuclear power. I think nuclear power is the most obvious solution to environmental issues. Hence, not investing in it is counterproductive.
• Change comes from within (the company). Many new investors have the belief that buying stock in a company gives money to that company. That's very rarely the case. The vast majority of stock is traded between investors - not from the company itself. When a person buys a share of XOM (Exxon Mobile) for $75.28, they are not giving Exxon $75.28. They are giving some other investor in the world $75.28 for that investor's share. In other words, you're not hurting or benefiting Exxon by choosing to buy their stock or not to buy their stock. However, companies are required to offer shareholders the ability to vote on shareholder proposals and board of directors members. My view is the most effective action for a shareholder to take is to deliberately invest in companies they don't like, and then use their voting power to empower activist shareholders to change the company. This is not a very common viewpoint, but funds that take this perspective are starting to be created. VOTE (Engine No. 1 Transform 500 ETF) is such an ETF - they use their ownership of large companies to vote for shareholder proposals to change the companies for the better.

Otherwise, outside "ethical" investing, I strongly suggest investing in a "target date retirement fund" - Vanguard, Fidelity, and Schwab all offer these. Target date funds should never be bought in a brokerage account, but they're perfect for an IRA account. These are truly "set and forget" - they will invest broadly across the world market, starting with more aggressive investment when someone is younger and moving towards less aggressive investment as someone is older (with the "target date" being when they retire). You can buy a target date fund with a date 40 years in the future, then never touch it again.
posted by saeculorum at 10:33 AM on January 30, 2022 [10 favorites]

All very good advice above. One thing I'd re-iterate is that she wants to be sure that it's being rolled-over, so any checks/transfers/distributions go to Fidelity (or Vanguard or whatever) rather than to Readery Jr. The first time I rolled over a 401k, it was paper checks and the guy at my bank that was helping me was adamant about checking the payee of the check 100 times. I think he'd been burned in the past.
posted by adekllny at 11:19 AM on January 30, 2022

I agree with everything said above about rolling it over to a low cost place. I used Vanguard to roll over several old accounts in the last year or so. Two of them were completely frictionless -- I filled out an online form on the Vanguard website, and then some days or weeks later the money had been transferred automatically to Vanguard, at which point you then go through the process of getting it allocated to the fund(s) you want, like the target date fund suggested above. But for one of them, it was a bit more involved, because the old place sent the funds as a check to me (but made out to Vanguard), so I then had to mail that check in. It was still simple enough to deal with and Vanguard (and I am sure every other place) gives you really clear step-by-step instructions to follow.
posted by Dip Flash at 11:53 AM on January 30, 2022

I have dealt a lot with Fidelity and Vanguard, and strongly prefer the latter. Fidelity seems to have a lock on big company 401(k)s, but their website and policies leave a lot to be desired. Vanguard really caters to individual investors.
posted by wnissen at 3:57 PM on January 31, 2022