Building your Portfolio

You got the call in the morning. By noon everyone in your unit had been laid off, including you. After years of good work, you are suddenly unemployed.

What do you do?

First, you remind yourself that your most valuable asset is yourself— your human capital. It’s the stock of knowledge and skills that you built through years of study and work. Job One is to re-engage that human capital.

After that, you make a list with the title “Important Details.”

Some of your human capital has already been converted into financial assets— the investments that have accumulated in the 401(k) plan of your former employer. Networking with others, you are surprised to learn many left their 401(k) behind. In fact, some left a trail of 401(k) s, like bread crumbs that matched their resume entries.

Being passive about your financial assets isn’t a good idea. For many former 401(k) plan participants leaving a company is a major opportunity to reduce investment fees and share less of your return with the financial services industry. Remember, fees are the only guaranteed part of your plan.

What do these companies have in common?

When we think about ultimate 401(k) plans, we think about household names like Bechtel, Boeing, Caterpillar, Deere & Co., Excelon, Fidelity, General Dynamics, International Paper, Principal Life Insurance, Wal-Mart. These are just a few of the companies being litigated right now. The lawsuits claim the fee structure imposed by third-party administrators, record keepers, investment managers, and other 401(k) service providers ( the food chain servicing the 401k) is excessive, undisclosed, illegal and may contain prohibited transactions.

Fidelity, the largest 401(k) provider, is facing litigation on a number of fronts: Alleged excessive fees, indirect fees hidden in the plan structure, undisclosed revenue sharing and failure to inform participants of a “long-standing agreement” with Fidelity to only choose Fidelity funds.

USA Today reports: “The fees charged 401(k) plans are all but invisible to investors who don’t know where to look. Making matters more confusing are complex fee arrangements – common in retirement plans – that often lump together administrative and fund-management fees.”

Recent Congressional hearings examined requiring 401(k) plans to be more transparent on fees. Plan costs were broken down into four categories: administrative, investment management, transaction, and “other”. The real win, however, is a requirement to offer plan participants at least one inexpensive index fund.

Roll Your 401(k)

Now that you are no longer with your former employer, there is no match to help cover plan costs. So you bear all the fees. A little time and energy spent to move your 401(k) to an individual retirement account (IRA) can dramatically reduce the fees you pay and, in turn, allow your retirement savings to grow faster, possibly a lot faster.

A 401(k) Rollover Checklist

A 401(k) rollover is the process of moving your 401(k) plan from a former employer into an IRA – individual retirement account – or another qualified plan. The reason to take advantage of the rollover is simple: Reduce the fees and expenses that can take a significant bite out of your future value. The following is a list of things to think about in the transition;

  • Do you have any of your employer stock in your 401(k) account? If so, you’ll want to seek the assistance of a tax professional who can determine if you should to take advantage of net unrealized appreciation – NUA. NUA allows you to pay current income tax on the average cost of the shares – cost basis. The shares are then held in a taxable account. When the shares are sold, the difference between the cost basis and the market value (also called NUA) is taxed at the long-term capital gains rate. This can result in significant tax savings. It gets still more interesting if you pass the stock along to your heirs. Their tax liability is based on the appreciation of the stock while it was held in the employee’s 401(k) account.
  • An IRA Rollover is a tax-free transfer from a 401(k) plan, to a traditional IRA. Tactically, there are two ways this is accomplished; Direct Rollover and Indirect Rollover.x
    1. In a direct rollover – also called a “plan-to-plan transfer,” – the eligible rollover distribution is transferred directly by the 401(k) plan administrator to the individual IRA rollover account.
    2. Under the indirect rollover, the 401(k) plan administrator writes a distribution check to the individual. You then have 60 days to transfer the entire amount received to an IRA rollover account. The distribution is not taxable if the transfer occurs within 60 days. A direct rollover is preferred.


How to Invest Your IRA Rollover

You can use the do-it-yourself Couch Potato plan for investing. Or you can use AssetBuilder to manage your IRA Rollover for you. At AssetBuilder, we construct portfolios to provide the highest return with a defined level of risk. We use a technique called mean variance optimization and a broad mix of asset classes to maximize diversification and minimize risk relative to expected return.