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Wall Street Steward Blog

Case Study: Leave the 401(k)

Under normal circumstances, I am a proponent of rolling over 401(k) assets as soon as one is eligible.  In fact, I have only encountered a handful of situations in my career when it made more sense to leave the 401(k) in-tact at the old company.

This case study is one of those situations.

The client had retired from his company 15 years earlier and still had a balance of $75,000 in his old retirement plan.  He has many other accounts that I handle for him, so it stood to reason that we would rollover his old 401(k) into his existing IRA with us. 

The plan had no unique investment options….everything was standard.

We began the conference call.  The normal account verification process took place.  We were good to go.  Then, I started to ask questions about the investment option that his 75k was currently invested in.

It was called the “stable value fund.”

“Has the fund ever had a negative year?”
“No sir.”

“How long has it been in existence?”
“19 years.”

“What is the best and worst calendar years it has ever had?”
“Ummm…best year was +9%, worst year was +4%.”

“What is the current yield on the fund?”
“4%.”

I immediately put the customer service lady on hold and had a discussion with the client.

The one negative about bonds currently is that they are likely to lose principal if interest rates rise.  Nearly every single economist is calling for interest rates to rise…so any fixed income investment should be carefully considered in this environment.

This one?  It was one I could not replicate in the IRA.

It had a long track record of a VERY stable nature and the worst year ever was positive 4%.  Also, it was currently paying 4% in an environment where 10 year treasury notes are paying 2.91%. 

So, the client could continue to hold this investment and enjoy daily liquidity and a VERY stable return, or rollover the investment and we could buy bonds which are not as liquid and offer a lower yield.  Hmmm.

“If I were you, I would leave that account there and keep it invested in that option at 100%.  I am going to use that as your bond allocation.  So, your money here will be heavier in stocks, but your total picture will still be in the middle.  50% stocks and 50% bonds.  The bottom line is that I cannot beat that rate of return in any investment that is even close to the low risk characteristics that the 401(k) choice has.”

“Sounds good to me.”

Client was thrilled, the 401(k) provider was happy, and I was elated that we did the right thing.  The selfish thing to do would have been to rollover the account and invest the money because it will not pay me a dime while it is still inside his former employer’s 401(k). 

No matter.  It was the right thing to do.  This is VERY rare, but in this case leaving the 401(k) along was the correct call.

Disclosures:
Investing in mutual funds involves risk, including possible loss of principle.  This is a hypothetical example and it not representative of any specific situation.  Your results will vary.  The hypothetical rates of returns used do not reflect the deduction of the fees and charges inherent to investing.  Past performance is no guarantee of future results. The market for all securities is subject to fluctuation such that upon sale an investor may lose principal. Government bonds and Treasury Bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.