Q: I just retired and have to decide if I should leave my money in my 401(k) with my previous employer or move it to an IRA. I know that the IRA gives me more investment options, but do I really need them? I also need to decide if I should place it the funds in a Target Retirement Fund or allow my portfolio to be actively managed.

Bill

A: There is nothing wrong with leaving your 401(k) with your previous employer, assuming you are satisfied with the investment options. Your previous employer will do right by you, even if only for legal and regulatory reasons. 

That said, my standard recommendation is to shift the savings into a rollover IRA. Control is a big reason. You and your household care more about your retirement savings than your previous employer. Thanks to multiple job changes over the years, many people also find themselves near retirement with stubs of 401(k)s and 403(b)s at various employers. Consolidating the plans eases the management of retirement savings and the development of withdrawal strategies.

Another advantage is choice. Your employer picked your 401(k) provider(s) and the menu of investment options. You get to choose where to put your money with the rollover IRA and, most importantly, pick low-fee investments.

Target-date funds vs. a professional adviser is more complicated. Briefly, I like target-date funds so long as fees are razor thin. Target-date funds tap into the insights of modern portfolio theory to automate the investment process and decisionmaking. The portfolio mix changes over time from a focus on growth (heavy stocks) toward income (more fixed income securities) as the retirement “target date” nears.

A criticism of target-date funds is that one size does not fit all. This isn’t wrong, but low-fee well-diversified target-date funds are a practical investment option that meet the needs of many savers. I would check out a subset of these funds, such as the Vanguard Target Retirement Income Fund and the BlackRock LifePath Index Retirement.

If you want to explore a more active route, consider tapping into one of the low-fee hybrid advisory services, such as Schwab Intelligent Advisory and Vanguard Personal Advisor Services. These services merge low-cost personal-financial planning advice with high-tech low-fee investment management. Compare these services as a baseline to what you would get hiring a higher cost professional planner.

 

Chris Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio.