High 401k Fees: Time to Rollover to Vanguard

For the past three years, I’ve let the ~$25k accumulated in an old company 401k account sit there after I left the company. I knew the expense ratios were probably high, but wasn’t paying that much attention and also thought it would be a hassle to rollover the account to an IRA.

Then I recently realized the expense ratio on my $25,000 was an average of 1.50% over four different funds (whereas my Vanguard expense ratios are around .20%) — Yikes! I took a few minutes out of my lunch hour today to figure out how difficult it would be to rollover the accounts to Vanguard. It turns out this wasn’t hard at all (or at least it didn’t seem to be, it’s all in transfer right now so I’ll let you know if it was as easy as it seemed.)

First, I created a rollover account on Vanguard and decided what funds I would invest in with the money when it arrived. This created an account # as well. I went to the 401k site and filled out a form for about 5 minutes to tell the bank to send the check directly to Vanguard and deposit in my new account. Easy peasy.

I can’t believe how high the expense ratio at my old 401k was — on a $25,000 investment that would be a fee of $375 per year. Assuming a modest 5% rate of growth every year, a $25k investment into a fund with a 1.50% annual expense ratio would cost $5712 over 10 years (including $4603.26 in fees and 1108.85 in foregone earnings.) However, an account with a .20% expense ratio would cost just $807.16 ($653.90 in fees and $153.25 in foregone earnings.) That’s a difference of $4905 — and that’s just on a $25,000 investment.

[calculate your fees on your 401k and other accounts on this free SEC calculator]

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6 comments

  1. Henrietta Schermeier says:

    Although it was probably worth it to do that, did you consider that you have now locked yourself out of the option to do backdoor roth IRA contributions forever without paying tax on that $25k? And with your income being so high, that sort of Roth tax advantaged space is hard to come by.

    1. hereverycentcounts ( User Karma: 0 ) says:

      Not sure I understand how this works. My income is still eligible for a Roth IRA (I put $5500 into one last year.) I don’t know if I could do a backdoor IRA from the 401k conversion. It sounds like I’d have to also convert my traditional IRA accounts and pay tax on the interest on all of it after the basis? And one can do a Roth conversion at any time and do this?

        1. hereverycentcounts ( User Karma: 0 ) says:

          I’ve read about that, but it doesn’t seem possible. If the 401k money was a regular 401k, that money was put in there pre tax. Even if I flip it to a Roth IRA it would still require paying taxes on all of the pre-tax money put in there. Is there some loophole I’m missing here? I get backdoor Roth conversions – where you fund an IRA and — if you have to fund it with post-tax dollars — you can flip it right away without having to pay extra tax on it. But not sure that works the same for a 401k that is w/ pre-tax money.

          1. Henrietta Schermeier says:

            That’s the point. Because of the pro-rata rule, since you will now have a traditional IRA with $25k pre-tax money, if you try to do a backdoor roth conversion, of the $5k post-tax you put into a traditional IRA to convert, no matter how much you convert from traditional to Roth, you will have to pay tax on 83% of the conversion since 83% of the money was pre-tax. If you didn’t have a traditional IRA, you can convert all $5k of new deposit to Roth without paying tax. My comment was that because you now have a traditional IRA with pre-tax money, it’s no longer worth it to do a backdoor Roth. If you left it in your old 401(k) or roll it into your current 401(k), you regain that option.

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