Ask An Advisor Series - Retirement and Investments

Should I rollover my 403(b) into an IRA or 401(k)?

I recently left my job in the nonprofit world where I had a 403(b). I now have an employer 401(k) as well as a personal IRA account. Which is the best account to rollover the money in my 403(b)? Or should I just leave the money in my 403(b)? How do I go about making this decision?

My short answer is this: whatever is best for you and not anyone else.

Actually, I already created a resource for situations like the one you are contemplating. For a full summary of the pros and cons of rolling over your 403(b) or 401(k) versus leaving your retirement plan with your former employer, you can download the PDF Guide found on my Life Stages Planning page, located within the Job Change section

More specifically, you might want to at least consider rolling the money out of the 403(b). The reason being is that 403(b) plans, for quite some time, have not been held to the same fiduciary standards as a 401(k). If you find it hard to believe that non-profit employees are paying more for their retirement plans compared to private sector employees (who own a 401(k)), I suggest reading the following article - Are You Getting Ripped Off With Your 403(b)?

If you took the time to read the article, you will notice that some annuity companies charge as much as 2.25%. Yikes! Seems crazy, right? Well, unfortunately, the progress of the DOL's proposed Fiduciary Rule has come to a grinding halt, which would have solved most of the problems that currently exist with 403(b) plans. Therefore non-profit sector employees will have to hope plan sponsors choose to provide better transparency and lower plan administration costs than what has been provided to them in years past.

While it is very possible that your 403(b) is more expensive than many other suitable alternatives, it is important to keep a balanced perspective. That is not all 403(b) plans are treated equally. In the 11 years that I have been doing this, I have seen some really bad plans and I have seen some great ones. Making a wise choice is truly a case by case evaluation process. Consequently, proper due diligence is your best course of action as you decide where to invest your money. If you are fee sensitive, I suggest comparing your retirement plan options across all platforms - 403(b) vs. IRA vs. 401(k) - by going to www.feex.com.

Now if you are deciding between an IRA and a 401(k), this choice really comes down to how much control you want to have over how your assets are being managed. 401(k) plans tend to be more hands off because you have a limited number of fund choices offered through your employer. Whereas, with an IRA you have unlimited investment options at your disposal. An IRA is your best bet when you want to buy individual stocks or other alternative securities because those options are traditionally unavailable to 401(k) participants. Furthermore, if you are managing the IRA yourself it is usually less expensive than rolling those funds into a 401(k). Especially if that money is rolled over to a "free" digital platform like Robinhood. 

In addition, an IRA that is being managed by a financial advisor is often more expensive than a company sponsored 401(k) plan. In other words, the advantage of the 401(k) is that you usually (not always) get lower fees from the sheer volume of assets being managed through your employer. Keep in mind, the overall size of your new company's 401(k) plan will dictate how much in fees are passing through to you the investor. Typically plans below $1,000,000 in assets will see fees that are upwards of 1.50% - 2.50%. In which case, those type of 401(k) plans are either more expensive or at least comparable to what your all-in costs would be with an IRA that is being managed by a financial advisor. 

Ultimately, "the right choice" is a matter of preference. That is, do you want lower fees without having to think much about it? Then go with the 401(k), or keep your retirement funds in the 403(b) if it is one of the good plans. On the other hand, the 2 scenarios where an IRA makes a lot of sense are: 1) if you want the lowest fees and are capable of managing the investments yourself, or 2) you want a financial advisor to help you manage your investments and ensure those assets are optimally coordinated with your financial plan. 


Should I use Lifecycle funds or pick my own investments inside my company's retirement plan?

I am 27, with a wife and two kids, and I recently got a job where my employer will match a contribution to a TIAA-CREF Retirement plan. I can either use their Lifecycle funds, or pick my own allocations between equities, real estate, fixed income, money market accounts, and annuities. What makes the most sense for someone like me?

Glidepath funds (AKA Lifecycle funds) are great for the investor who wants to put their retirement investing on autopilot. Lifecycle funds are meant to adjust the asset allocation from more aggressive to more conservative as you approach retirement. What this means is that you get professionally managed pre-set allocation portfolios that gradually shift from a growth strategy to a principal preservation strategy.

Unfortunately, there is a bone I have to pick with lifecycle funds. My issue is that you are unintentionally setting your portfolio up to time the market. What if the timing of your gradual decline in stock exposure happens at an inopportune time? You are SOL, that is what! And the fund didn't do what it was meant to do, which is making sure your money lasts through retirement. Furthermore, not all lifecycle funds use the same steepness in slope in terms of their shift away from stocks to more conservative asset classes like bonds and cash. 

On the other hand, lifecycle funds are usually a better alternative to letting an amateur investor select their own funds. The reason is that most novice investors chase yesterday's winners, buy high and sell low, and don't properly diversify their accounts. 

Customizing a portfolio and selecting the right lineup of funds is usually best saved for the investor who knows what they are doing or the investor that has a financial advisor assisting them. An advisor can be especially helpful by matching assisting the retirement plan participant in matching the fund mix to their risk tolerance and overall goals. 

However, if you choose to DIY, the best way to figure out the right mix of investments is to take a risk tolerance questionnaire - Vanguard has a free tool or you can click the previous hyperlink to mine and see how you score out.  Once you have your risk score, use the results to map over the right amount of exposure to each investment asset class (i.e. large cap, small cap, international). In addition, I recommend you set up your investment allocation to automatically rebalance at least annually. This ensures you stay within the risk range you are most comfortable with, as well as accomplishes the old adage of "buying low, selling high." 

The bottom line is this, like most things in life, choosing a lifecycle fund versus a custom allocation within your retirement plan is very much tied to each person's individual circumstances. What's right for one person isn't going to be right for another person. Really, the best thing you can do as an investor is to stay diversified and keep a long-term perspective. For those who remain disciplined and stay patient, the intended results usually follow. 


How can I buy oil as an investment?

Besides owning physical crude oil, there are 3 ways for an investor to gain exposure to the price movements of oil:

  1. Investing in oil futures contracts
  2. Investing in commodity Exchange Traded Funds (ETFs) that track oil futures
  3. Invest in an oil sector fund or buy the stock of companies whose primary business is related to oil

1) Investing in oil futures contracts is an efficient way to directly invest in oil as a commodity. This type of strategy is best suited for accredited investors because it carries a higher degree of risk and is generally more capital intensive than the other two investment alternatives. Basically, investors who buy/sell oil futures are agreeing to buy/sell oil at a future price. Meaning the difference in price between the day the futures contract is bought versus the price on the day the contract expires is the profit or loss realized to the investor.  For example, say an investor buys a futures contract, that person profits when the price of oil goes up. Whereas, the opposite is true if the price goes down. For investors who sell futures contracts, they profit when the price of oil goes down and lose money when the price goes up.  

2) Oil commodity ETFs such as USO and DBO can be an effective way for everyday investors to get indirect exposure to the daily price movements of oil futures like the West Texas Intermediate crude. ETFs offer the investor liquidity because they are readily traded like a stock on the major exchanges. However, it is important to note that these type of ETFs are better-suited for day traders because of the long-term deviation from the price of the commodity itself. This difference in value occurs because there is a cost to the fund whenever futures contracts expire and need to be renewed. In other words, these transaction costs can add up to a significant amount in the long-term and is why a "buy-and-hold" type of investor should beware.

3) The most common way for investors to get access to the price movements of oil is buying sector ETFs like iShares Global Energy (IXC), or buying individuals stocks in the crude oil business like Exxon (XOM). To a certain degree, investors are able to experience a high-level of correlation between the price movements of crude oil and the profitability of companies within the oil sector. Some companies are more efficiently run than others, which will have a direct impact on those companies' ability to generate profits. It should also be noted that buying a sector fund gives the investor better overall diversification versus owning an individual company. On the other hand, buying a single company allows an investor to exclude any number of companies that appear unattractive within the oil sector.


I am the beneficiary of some non-qualified, variable, deferred annuities; is there a way to put a "floor under the market" to protect against a downturn in the stock market?

Annuitizing with a joint and survivor feature accomplishes your goals of putting a "floor under the market" and allowing the income to continue for your beneficiary. Once annuitized, the account is no longer subject to market value fluctuations and the dollar amount you annuitize is locked-in to determine your guaranteed income stream. I would also suggest adding a cash refund feature, so that if something happens to both you and your beneficiary that someone else gets the remainder of the annuity's value. Otherwise, the insurance company gets to keep your money. 

If you opted against annuitization, bear in mind that variable annuities usually have a fixed interest rate option that will protect the principal from market losses. Do not choose the money market subaccount for principal protection because the variable annuity fees are typically higher than the interest earnings, therefore, your account value will slowly erode. 

For more helpful tips about annuities and other options to consider, you can learn more by reading about it here


Which is the more tax-friendly account to distribute from?

I am 64 years old and have a pension and SS income. I also have a IRA and a taxable investment account. My question is, which account is more tax friendly to withdraw from considering I will face Required Minimum Withdrawals in a few years? My home is in Ohio and I currently pay Ohio state income tax and a municipal tax in addition to federal taxes.

The playbook says to take withdrawals from your taxable investment account first. The primary reason being long-term capital gains/dividend tax rates are 15% - 20%. For a retiree, your capital gains could be 0% if your taxable income is low enough.  You would most likely need to do some tax loss harvesting in order to fall into the low-income tier.  

Basically for most people paying the capital gains/dividend tax rates is a lower percentage than if they withdraw money from their IRA. Traditional IRAs are taxed at ordinary income rates and could potentially bump you into a higher tax bracket faster than pulling from your after-tax investments.  

Also, keep in mind that you can invest in Ohio municipal bonds to generate tax-free income both at the federal and state level. Other types of bonds are taxed at ordinary income tax rates.