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I was shoveling the driveway today and heard a radio show (radio infomercial?) called "the Mutual Fund Store Show." I have never used their services and never will use their services, I just needed something to listen to while I shoveled. However, they gave what I thought was awful advice today to a caller.
This "Mutual Fund Store" told a caller to roll his $10K from an IRA into a brand new job's 401K (if the employer will let him). The "Mutual Fund Store" said that this would build a "base" for the 401K and would be the best move. They were vague on the reasoning other than this bigger "base" would be a good start for future growth in his 401K.
Is this not horrible advice for the following reasons:
1) A Vanguard IRA should most likely have more options and smaller fees than his employers 401K.
2) An IRA is in his own name alone. While a 401K is also in his employer's name - my wife in her 20s had a previous employer steal $$$ out of employees 401Ks - she has never gotten all of the money back and he is still in prison last I heard. I would in fact, tell someone to do the opposite -- roll a 401K into an IRA if they get the chance to do so penalty free.
3) What advantage is there to building a $10K "base" for a 401K -- if that extra base just means you lost your $10K IRA? It seems like a mathematical trade off at best - until you figure out that you most likely lose with higher expense ratios in a 401K and have to possibly pay fees to sell your investments in the IRA.
Am I missing something here?
They seem to charge their customers by %, so are they just trying to get more fees to collect from the 401K? Or a more impressive large # to look at, instead of 2 smaller #s to impress the client???
Without understanding context, it's not able to say whether this is good or bad advice.
Here is some better context - if I remember correctly...
Guy calls in and says he has a traditional IRA with about $10K in it and just started a job with a 401K that has a 3% match. The guy's question is should he invest up to 3% to get the doubling match in the 401K and then all surplus investments above the 3% be placed into his IRA.
Mutual Fund Store's advice: Roll the entire IRA into the 401K to build a "base" for growth going forward and then put 100% of every future contribution into the 401K (which would effectively kill off the IRA).
I would think they would want you to take your IRA, and transfer it to "them" to manage so that could make fees from it.
Moving it from a IRA to a 401K (If the employer allow it), Is only a good idea, if the fees are high/bad fund choice, where it currently at. But you can move your IRA to any other brokerage/fund manager with lower fees.
Interesting. However, no mention of Roth was ever made. Just moving an IRA into a 401K to build the "base" for the 401K.
Was that a traditional IRA that you then paid taxes on during the roll over to the Roth 401K?
My income is too high to contribute to a Roth IRA. So I took my traditional IRA and transferred it my 401k. Tax free transfer. My 401k is part roth but that's irrelevant for this discussion.
So now I have zero in traditional IRA. I then contribute to my empty traditional IRA the max but it's a nondeductible contribution. I wait a day and convert my traditional IRA that has basis to a roth. Tax free transfer.
If I had kept the original IRA only a portion of my rothconversion would have been tax free. I needed it to be zero.
My "Guess" is because its a small amount 10K, It probably not worth it to them to "Manage" it,
Did invite him to stay on the line after the show for some more in-depth conversation. We also don't know what information that have about him/his investment style, (My guess that sort of stuff is feed into them from the call screamer)
If it's a show promoting conventional open-end mutual funds as reasonable choices even when one has better options, I don't think much of it anyway. I remember when small investors had to put up with their fundamentally flawed model as the price of diversification, but nowadays, blech.
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