401 K rollover (annuity, Scottrade, IRA, brokerage)
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We need to rollover the 401 K from my husbands last job. We are meeting with someone tonight who my husband met last week. He advised that we put all of that money in an account with his company that is a guaranteed 6% for a year and then 4% after that-we can change the investment anytime without tax according to this guy. We are 37 and it is a pretty decent sum of money. I feel this may be a little too conservative. I am not sure exactly what type of an account this is-my husband did not ask. He also advised that we not contribute the max to our 401k's and purchase $7200 in IRA's each year.(again with his company) I am not sure what to make of any of this, but something isn't sitting right with me. We are both in health care and like a lot of America pay less attention to our investments than we should. Any advice on how this sounds or questions to ask this guy? His advice on the 6% then 4% account he said was to protect our money from the volatile market right now. Thanks for any help.
I left the information out that the company is Valic(associated with AIG) and the fund is an IRA that he says has no surrender charge or transaction fees. Being associated with AIG doesn't seem like a positive. My husband chose this guy on the recommendation of some coworkers. Valic is one of the vendors for his new 401K.
1) You need to find out exactly what investment(s) he is recommending for within the IRA and all of the fees associated with investing in it. Until you know that, there's no need going any further.
2) If anything about "annuities" is mentioned, run the other way.
3) If you're in your thirties and you feel 4% per year is too conservative, then it probably is. Lots of people went conservative to "protect themselves from a volatile market" 9 months ago--and right now they're hating themselves. Do you trust this guy--whoever he is--to time the market for you? Will he be able to tell you when it's a good time to jump back IN to the market too? (Answer: Not likely.)
4) It often IS smart NOT to max out the 401k (beyond the company match) and to invest that money in a Roth IRA instead. But it does matter WHERE you open that IRA and WHAT you invest it in--which brings us back to 1, 2 and 3.
The things that are appropriate for an after tax / non-employer match retirement investment are VERY DIFFERENT for someone in the latter part of their working years than for some one who is much nearer the mid-point of their career.
I would be extremely reluctant to enter into any sort of agreement that I did not fully understand. The situation described by the OP sounds less than prudent -- 30 years at 4% is not wise for someone to accept.
He says the IRA plan is the Valic Portfolio director and there are no management fees or surrender charges. Have either of you ever heard anything about this? Is it normal to have no fees associated with something(or are they hidden)?
Most investment planners suggest that placing an annuity into an IRA is not the most efficient use of one's funds. While annuities typically do not have management fees or surrender charges there are other limitations / trade offs on such instruments that some would consider baked into the product...
The fees come in either buying the funds themselves inside the IRA or in buying their high priced fee funds. No IRA that I know of has a fee to simply deposit money in it. To be honest, if you're up to it, your average person can open an IRA with any large bank or investment firm. Full service or bare bones. Fidelity to Scottrade. Your adviser than then direct purchases and sales on your behalf. Depending on how much money you have in the account this can be more expensive percentage wise or less expensive, as typically advisers like that are on a fee-based schedule.
This allows you to keep possession of the account and keeps your long term interests at heart.
My wife had an adviser affiliated with a particular company from before we were married. After reviewing the transactions he was buying his particular companys funds and funds that had some of the highest up front transactions fees I've ever seen.
1) You need to find out exactly what investment(s) he is recommending for within the IRA and all of the fees associated with investing in it. Until you know that, there's no need going any further.
2) If anything about "annuities" is mentioned, run the other way.
3) If you're in your thirties and you feel 4% per year is too conservative, then it probably is. Lots of people went conservative to "protect themselves from a volatile market" 9 months ago--and right now they're hating themselves. Do you trust this guy--whoever he is--to time the market for you? Will he be able to tell you when it's a good time to jump back IN to the market too? (Answer: Not likely.)
4) It often IS smart NOT to max out the 401k (beyond the company match) and to invest that money in a Roth IRA instead. But it does matter WHERE you open that IRA and WHAT you invest it in--which brings us back to 1, 2 and 3.
He says it is an IRA and annuity with a "fixed option" as the first investment choice. This feels like a bad decision to me and everyone on here seems to agree so far.
That being said what is the smartest choice to do with a 401 K from an old company? If it is doing well do you just leave it there? I must add that my husbands current company contributes a lot to the 401K. They contribute 8.9 % of the first 51K and 13.2% after that. One of the reasons he took the job. Is it better to have all the money in one 401 K? Or are there other options that make more sense to do with your 401K when leaving a company? Also, why is it smart to not max out the 401K-diversity I assume? Sorry for all the questions. I have been on city data for a long time but am obviously new to this board.
Last edited by trayandtom; 11-30-2009 at 04:30 PM..
Reason: needed to add
Open a self directed IRA at someplace like Schwab, Vanguard or Fidelity. All of them make it dead nuts easy to properly rollover a 401K from a former employer and they have decent educational offerings so that you can decide what mix of funds makes the most sense for you. All of them offer much more choices than any 401K and will provide you the opportunity to treat things more or less conservatively than the active employer 401K. If you have tens of thousands of dollars now or at some point in the future you can explore more options but for now a nice mix of funds and / or ETFs should be the goal.
He says it is an IRA and annuity with a "fixed option" as the first investment choice. This feels like a bad decision to me and everyone on here seems to agree so far.
That being said what is the smartest choice to do with a 401 K from an old company? If it is doing well do you just leave it there? I must add that my husbands current company contributes a lot to the 401K. They contribute 8.9 % of the first 51K and 13.2% after that. One of the reasons he took the job. Is it better to have all the money in one 401 K? Or are there other options that make more sense to do with your 401K when leaving a company? Also, why is it smart to not max out the 401K-diversity I assume? Sorry for all the questions. I have been on city data for a long time but am obviously new to this board.
Annuities, in general, are infamous for being expensive, the fixed annuities less so. Every benefit these things provide has a fee attached to it, whether apparent or not. For most people, annuities are not the best option, yet they're heavily pushed by many advisors. Why? Because annuities make money for the ADVISORS & INSURANCE COMPANIES.
As for your old 401k, it's usually a good idea to roll that into an IRA, as suggested. This gives you more investment options and better control than you'd have leaving it in the 401k. Open an account with a DISCOUNT brokerage (like those mentioned previously), not a full-service brokerage, and manage your own investments. If you need guidance, use a fee-only planner/advisor.
What I meant about it not always being smart to max out the 401k is, sometimes it makes more sense to contribute just enough to the 401k to take full advantage of the company match and then put any extra into a Roth IRA instead. Roth contributions are taxed NOW, but all future qualified withdrawals, including gains, will come out TAX-FREE, as opposed to 401k withdrawals which are taxed at your regular income tax rate. This can be a smart move especially for those currently in a modest tax bracket. If, after contributing enough to get the 401k match and after maxing out the Roth, you still have money to invest, THEN max out the 401k. Not saying this is the best move for everyone--it's not, of course.
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