When you leave an employer with a 401k, we recommend that you roll your 401k into an Individual Retirement Account (IRA). Here are three reasons why:
- 401k plans usually have very few investment options, many times less than 20. In an IRA, you have thousands of options. Most 401ks only allow you to invest in mutual funds not ETFs (Exchange Traded Funds) (which have lower expenses than mutual funds), in CDs, individual stocks, treasuries, structured notes.
- The options in a 401k are many times very expensive – high expense ratios. An expense ratio is is the annual fee that all funds charge their shareholders. It directly reduces your return. It is the percentage of assets deducted each year for fund expenses, including 12b-1 fees (broker sales fee), management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund. It has been shown that over the long run, lower expenses result in a better return.
- There can be other fees associated with a 401k plan. Your former employer can change who manages the 401k plan and change the plan holdings, at any time.
You must be separated from the company with the 401k plan before you can move it.
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