Q Because of job changes, I have my 401(k) retirement funds in two mutual fund companies, Fidelity and Vanguard. I chose the same types of funds in both accounts, large cap, mid cap, small cap, and international. I was considering consolidating all of the funds in one account, but then I realized that would be putting all of my eggs in one basket. Should I consolidate my retirement funds for simplicity's sake, or keep them separate for safety's sake?


A Your retirement savings situation is common among people who have changed jobs. The question is more pressing than before, too, following the financial turmoil of the past few years, including the collapse of investment banks Bear Stearns and Lehman Brothers and the massive theft engineered by Bernie Madoff.

Yet it's easier to manage a retirement portfolio if the money is at one institution that offers good service, low fees and investment choice. Both Vanguard and Fidelity are good companies. But is the price of convenience and lower fees increased risk? Perhaps a little, but not by enough to stop you from consolidating accounts. I'm a big believer in diversification, but in the kind of situation you've described, going with one of the two mutual fund companies is fine for a couple of reasons.

The most important is that your money is invested in the actual securities. The money managed by mutual fund companies is kept in separate trust accounts at a custodial bank. In other words, even if Fidelity or Vanguard got into trouble you still own the actual securities in segregated accounts held at another institution. It's a strong firewall from the kind of Ponzi scheme run by Madoff and other crooks. Of course, ownership doesn't prevent the value of your portfolio from going down. But it does protect you from theft.

Your stock portfolio is well diversified, from large cap to international equities. Diversification remains one of the most powerful ways to protect your finances from catastrophe. Although diversification isn't much protection during the height of a major market crash, it pays off over time. Another reason why it's okay to consolidate your retirement portfolio is that most of us end up with a kind of natural financial institution diversification over the years. Yes, you'll have the bulk of your retirement money with either Vanguard or Fidelity. But I bet you have savings at a bank or credit union, perhaps a term or whole life policy with an insurance company, and so on. Your household is probably reasonably well diversified.

Chris Farrell is economics editor for "Marketplace Money." Send questions to cfarrell@mpr.org.