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Employer 401k has no brokerage window option. What should I do?


muscleman
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I am currently planning to switch to a new employer. Unfortunately its 401k has no brokerage window option, which means I could no longer buy and sell individual stocks.

Is there a way to work around this issue?

I would definitely try to lobby their 401k plan admin, but I won't be too optimistic on that.

How about transferring my current 401k to an IRA, contribute $5500 per year to it, and then for my new employer's 401k plan, I only contribute 4% per year just to get their match, and put it into an index fund?

 

Is there a better option?

 

The other thing that  I don't understand: Why is the IRA annual limit only $5500, but 401k limit is $17500?

It is just too annoying that this is my money and I will have no freedom to control it. ::)

 

 

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I ran into the same thing 2 years ago when I changed employers.  My old employer used Fidelity for their 401K which had a "Brokerage Link" option, my new employer uses Transamerica which doesn't.  I am doing almost what you suggested.  One I rolled over my old 401K into an rollover Traditional IRA (I manage this, but no longer contribute to it), I max out my Roth IRA every year, and contribute 8% to my new 401K invested in whatever mutual funds they have available.  They have a bunch of funds, I just allocated 5% each into 20 of them.

 

Yes, it pisses me off as well that someone else other than me decides where and how I can invest my money.

 

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I ran into the same thing 2 years ago when I changed employers.  My old employer used Fidelity for their 401K which had a "Brokerage Link" option, my new employer uses Transamerica which doesn't.  I am doing almost what you suggested.  One I rolled over my old 401K into an rollover Traditional IRA (I manage this, but no longer contribute to it), I max out my Roth IRA every year, and contribute 8% to my new 401K invested in whatever mutual funds they have available.  They have a bunch of funds, I just allocated 5% each into 20 of them.

 

Yes, it pisses me off as well that someone else other than me decides where and how I can invest my money.

 

I know we are trying to be stock pickers here but why not choose the best fund available?

 

For my 401k, I avoid the S&P500 index fund and get the MSCI EAFE/MSCI World funds for more exposure to international markets. My holdings in my IRA/regular are primarily U.S. companies. I also get my fixed income allocation from an actively managed mutual fundd.

 

I have access to some great low cost Vanguard index funds and some good value managers with low expense ratio funds. I know "market return" is not as sexy as what we aim for here but I think having funds in my 401k makes sense for my asset allocation. 

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I ran into the same thing 2 years ago when I changed employers.  My old employer used Fidelity for their 401K which had a "Brokerage Link" option, my new employer uses Transamerica which doesn't.  I am doing almost what you suggested.  One I rolled over my old 401K into an rollover Traditional IRA (I manage this, but no longer contribute to it), I max out my Roth IRA every year, and contribute 8% to my new 401K invested in whatever mutual funds they have available.  They have a bunch of funds, I just allocated 5% each into 20 of them.

 

Yes, it pisses me off as well that someone else other than me decides where and how I can invest my money.

 

I know we are trying to be stock pickers here but why not choose the best fund available?

 

For my 401k, I avoid the S&P500 index fund and get the MSCI EAFE/MSCI World funds for more exposure to international markets. My holdings in my IRA/regular are primarily U.S. companies. I also get my fixed income allocation from an actively managed mutual fundd.

 

I have access to some great low cost Vanguard index funds and some good value managers with low expense ratio funds. I know "market return" is not as sexy as what we aim for here but I think having funds in my 401k makes sense for my asset allocation. 

 

Many good points.  I did the allocation on my first day when I set it up, thinking that I'd do more research and figure out what to do later.  I just never did.  Reading mutual fund prospectuses where each fund owns a ton of different stocks in a ton of different industries all subject to change at any time at the whim of the management is about as exiting as watching your grass grow.  Do you then try to keep tabs on what they are doing year by year and reallocate?  Oh gee this fund now has 1.43% in XOM, it was 1.18% last year....   

 

Still, I am way overweight North America, you have a good point. Putting a higher percentage in foreign funds might make some sense.

 

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I ran into the same thing 2 years ago when I changed employers.  My old employer used Fidelity for their 401K which had a "Brokerage Link" option, my new employer uses Transamerica which doesn't.  I am doing almost what you suggested.  One I rolled over my old 401K into an rollover Traditional IRA (I manage this, but no longer contribute to it), I max out my Roth IRA every year, and contribute 8% to my new 401K invested in whatever mutual funds they have available.  They have a bunch of funds, I just allocated 5% each into 20 of them.

 

Yes, it pisses me off as well that someone else other than me decides where and how I can invest my money.

 

I know we are trying to be stock pickers here but why not choose the best fund available?

 

For my 401k, I avoid the S&P500 index fund and get the MSCI EAFE/MSCI World funds for more exposure to international markets. My holdings in my IRA/regular are primarily U.S. companies. I also get my fixed income allocation from an actively managed mutual fundd.

 

I have access to some great low cost Vanguard index funds and some good value managers with low expense ratio funds. I know "market return" is not as sexy as what we aim for here but I think having funds in my 401k makes sense for my asset allocation.

 

What is the chance of lobbying the 401k admin to add the brokerage link option? In Vanguard, over 29% of the 401k participants added this option already. I definitely see a trend here.

After all, this is America, and I should have the freedom to invest my own money! >:(

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I ran into the same thing 2 years ago when I changed employers.  My old employer used Fidelity for their 401K which had a "Brokerage Link" option, my new employer uses Transamerica which doesn't.  I am doing almost what you suggested.  One I rolled over my old 401K into an rollover Traditional IRA (I manage this, but no longer contribute to it), I max out my Roth IRA every year, and contribute 8% to my new 401K invested in whatever mutual funds they have available.  They have a bunch of funds, I just allocated 5% each into 20 of them.

 

Yes, it pisses me off as well that someone else other than me decides where and how I can invest my money.

 

I know we are trying to be stock pickers here but why not choose the best fund available?

 

For my 401k, I avoid the S&P500 index fund and get the MSCI EAFE/MSCI World funds for more exposure to international markets. My holdings in my IRA/regular are primarily U.S. companies. I also get my fixed income allocation from an actively managed mutual fundd.

 

I have access to some great low cost Vanguard index funds and some good value managers with low expense ratio funds. I know "market return" is not as sexy as what we aim for here but I think having funds in my 401k makes sense for my asset allocation.

 

What is the chance of lobbying the 401k admin to add the brokerage link option? In Vanguard, over 29% of the 401k participants added this option already. I definitely see a trend here.

After all, this is America, and I should have the freedom to invest my own money! >:(

 

 

I agree with both of you about having the freedom to invest our own money. But I think I'm fairly lucky with my 401k plan despite not having a brokerage window. My plan doesn't charge fees as my company covers everything, the funds all have low expense ratios, and the variety of index funds available are the lowest cost share classes.

 

This is not the norm for most people. I know many people with crappy, expensive plans with terrible funds. One of my friend's plan had all active funds except for one S&P 500 index fund but that index fund has an expense ratio of 1.6%.... And hat was the cheapest option available...amazing...

 

Depending on your company, you might be able to lobby to get the window added or at least add some some low cost index funds or low cost active funds.

 

For the longest time, my company offered 5 active funds (albeit value/relatively low expense) and 1 money market fund. Then they finally added 5 Vanguard index funds 2 years ago.  It's a giant step in the right direction~!

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I ran into the same thing 2 years ago when I changed employers.  My old employer used Fidelity for their 401K which had a "Brokerage Link" option, my new employer uses Transamerica which doesn't.  I am doing almost what you suggested.  One I rolled over my old 401K into an rollover Traditional IRA (I manage this, but no longer contribute to it), I max out my Roth IRA every year, and contribute 8% to my new 401K invested in whatever mutual funds they have available.  They have a bunch of funds, I just allocated 5% each into 20 of them.

 

Yes, it pisses me off as well that someone else other than me decides where and how I can invest my money.

 

I know we are trying to be stock pickers here but why not choose the best fund available?

 

For my 401k, I avoid the S&P500 index fund and get the MSCI EAFE/MSCI World funds for more exposure to international markets. My holdings in my IRA/regular are primarily U.S. companies. I also get my fixed income allocation from an actively managed mutual fundd.

 

I have access to some great low cost Vanguard index funds and some good value managers with low expense ratio funds. I know "market return" is not as sexy as what we aim for here but I think having funds in my 401k makes sense for my asset allocation.

 

What is the chance of lobbying the 401k admin to add the brokerage link option? In Vanguard, over 29% of the 401k participants added this option already. I definitely see a trend here.

After all, this is America, and I should have the freedom to invest my own money! >:(

 

I've been down the lobbying road myself.  You need a certain amount of assets for the brokerage window.  I had numerous conversations with the CEO/COO/Head of HR before they finally decided to do anything.  What ended up happening was they let me participate in their yearly reorganization meeting to select funds.  Company executives are held to a fiduciary standard for the fund, I was not.  They would say a fund name and I could offer my input on them, they discussed the options then decided.  Technically I wasn't involved in the process, yet all of my recommendations were taken.

 

I took the CEO to lunch and gave a presentation as to why we needed more options and needed to change the 401k.  I was able to add a number of index funds and 'cheap' investment options in addition to a number of foreign funds.  I would have loved the brokerage window, but it's just not feasible for companies without a critical mass of assets.  It's possible your company might be able to upgrade to a brokerage window if they're small, but I've heard a quote of $500-2k a year in fees per individual to support that option, this was at Fidelity.

 

Best thing to do is put your money in some index funds and get the employer match, then invest outside of the fund.  When you switch jobs you can free up that money and invest it in an IRA somewhere.

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I too have also tried lobbying head of HR for a self-directed option...to no avail.  The response was because of fiduciary duty, they thought offering it could do more harm for some EE's than the benefits it would offer other EE's.  Basically, to protect the retirement assets from day-trading. 

 

The strategy of index fund and then rollover is good, but if you want to have a long-term career at a company then this doesnt really help.  If you are young, married, and both spouses are maxing out (17500), plus getting a match, then you are probably saving $40k-50k per year.  After a few years with the same company, this very quickly becomes a large % of net worth. 

 

My strategy has been to invest my 401k assets in asset classes I don't normally get much exposure to in my actively managed accounts, such as REITs, fixed income, and emerging markets.  I have a 0% weighting to domestic equities.  I have also been lucky in that the funds offered are either index funds or funds with fairly decent track records. 

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I am currently planning to switch to a new employer. Unfortunately its 401k has no brokerage window option, which means I could no longer buy and sell individual stocks.

Is there a way to work around this issue?

 

1)  Roll your current 401k to Fidelity (or wherever you want your IRA).

2)  Then at your new company, invest the 401k in bond income funds. 

3)  Use you IRA at Fidelity to buy a few deep-in-the-money call options.  Just enough leverage to offset what you've got building in the new employer 401k plan.

 

This way, you make income in one account, and it offsets the cost of the leverage in the IRA.

 

Hopefully your stock picking will be good and the IRA will grow much faster than the 401k builds up.

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It's possible your company might be able to upgrade to a brokerage window if they're small, but I've heard a quote of $500-2k a year in fees per individual to support that option, this was at Fidelity.

 

I was part of the 401k committee when my 80 person company switched to Fidelity last year. I persuaded them to add several low cost index funds. But I wasn't very successful in keeping actively managed funds out of the plan - we ended up with 50 funds filling every imaginable style box.

 

According to the Fidelity rep, Brokerage Link is provided at no additional cost to the company ($200 annual cost to participants). I didn't push for it but it's very nice to have.

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I am currently planning to switch to a new employer. Unfortunately its 401k has no brokerage window option, which means I could no longer buy and sell individual stocks.

Is there a way to work around this issue?

 

1)  Roll your current 401k to Fidelity (or wherever you want your IRA).

2)  Then at your new company, invest the 401k in bond income funds. 

3)  Use you IRA at Fidelity to buy a few deep-in-the-money call options.  Just enough leverage to offset what you've got building in the new employer 401k plan.

 

This way, you make income in one account, and it offsets the cost of the leverage in the IRA.

 

Hopefully your stock picking will be good and the IRA will grow much faster than the 401k builds up.

 

Eric,  if someone is young, wouldn't they still be better off (long term) just investing directly into the market? It's not like you can use the 401k income generated from the bonds to do much else besides reinvest (unless your plan allows in-service distributions).

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I am currently planning to switch to a new employer. Unfortunately its 401k has no brokerage window option, which means I could no longer buy and sell individual stocks.

Is there a way to work around this issue?

 

1)  Roll your current 401k to Fidelity (or wherever you want your IRA).

2)  Then at your new company, invest the 401k in bond income funds. 

3)  Use you IRA at Fidelity to buy a few deep-in-the-money call options.  Just enough leverage to offset what you've got building in the new employer 401k plan.

 

This way, you make income in one account, and it offsets the cost of the leverage in the IRA.

 

Hopefully your stock picking will be good and the IRA will grow much faster than the 401k builds up.

 

Eric,  if someone is young, wouldn't they still be better off (long term) just investing directly into the market? It's not like you can use the 401k income generated from the bonds to do much else besides reinvest (unless your plan allows in-service distributions).

 

Sure, but I have my doubts that he'll ever spend more than roughly 5-10 years at a given company before moving on to the next one.  Let's say I'm right -- then whenever he moves employers he rolls the 401k to the IRA.

 

 

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You got lots of good advice. I would add asset protection as a consideration when choosing between staying in a 401k vs moving to an IRA. 401k has the most protection from creditors (as in someone suing you). The main things it would not protect are divorce and IRS. IRA is not as solid and varies by state. So if asset protection is important for you, you might want to keep it all or a portion of your assets in 401k.

 

Vinod

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I am currently planning to switch to a new employer. Unfortunately its 401k has no brokerage window option, which means I could no longer buy and sell individual stocks.

Is there a way to work around this issue?

 

1)  Roll your current 401k to Fidelity (or wherever you want your IRA).

2)  Then at your new company, invest the 401k in bond income funds. 

3)  Use you IRA at Fidelity to buy a few deep-in-the-money call options.  Just enough leverage to offset what you've got building in the new employer 401k plan.

 

This way, you make income in one account, and it offsets the cost of the leverage in the IRA.

 

Hopefully your stock picking will be good and the IRA will grow much faster than the 401k builds up.

 

Eric,  if someone is young, wouldn't they still be better off (long term) just investing directly into the market? It's not like you can use the 401k income generated from the bonds to do much else besides reinvest (unless your plan allows in-service distributions).

 

Sure, but I have my doubts that he'll ever spend more than roughly 5-10 years at a given company before moving on to the next one.  Let's say I'm right -- then whenever he moves employers he rolls the 401k to the IRA.

 

 

That is right. After working for MSFT for nearly five years, I finally realized that American corporation are totally different that Asian ones. In Asian, companies try their best to keep the veteran employees to work as long as possible, hopefully commit their lifetime to it. But in America, the grass is always greener on the other side of the valley, (employees working in the competitors always seem more attractive than its own employees) and it is much easier to  get promotion and pay check raise if I regularly switch companies. This is quite sad, but if this is the game rule here, I will follow it. :)

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You got lots of good advice. I would add asset protection as a consideration when choosing between staying in a 401k vs moving to an IRA. 401k has the most protection from creditors (as in someone suing you). The main things it would not protect are divorce and IRS. IRA is not as solid and varies by state. So if asset protection is important for you, you might want to keep it all or a portion of your assets in 401k.

 

Vinod

 

How about this to ease your concern:

 

1)  Quit Job

2)  Open Fidelity "self-employed 401k" -- perhaps you become a self-employed handy man for a few months between jobs

3)  Roll your employee 401k assets (and perhaps other IRA accounts as well) to the new self-employed 401k.

4)  start new job at new employer

 

There, now you have it all in a 401k, not in an IRA

 

Ah... there's a catch for solo-401k plans:

 

If your savings are in a 401(k) account, they are protected from all forms of creditor judgments, including bankruptcy, says Kyle Brown, a retirement counsel with Watson Wyatt Worldwide in Arlington, Va. Solo 401(k)s, however, don't necessarily have the same protections as other 401(k) plans; in some states, solo 401(k)s are protected from creditors, but in others they aren't.

 

http://online.wsj.com/news/articles/SB124181801239401917

 

 

Some states give good protection to IRAs (others don't):

 

Other states, such as Texas, Arizona and Washington, protect virtually everything inside an IRA from creditors. In Arizona, for example, only contributions made within the last 120 days can be subject to creditors' claims in a bankruptcy.

 

http://www.latimes.com/la-ira-story3,0,6977190.story#axzz2j51AkHYR

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This link might give you some additional detail on whether your particular states protects solo 401ks (and even IRA's).  It does state by state and give a summary plus a link to the relevant state statute.  There's some interesting stuff in the state statutes.

 

Also, I recall that someone recently asked about trust for creditor protection.  Reading the through the New York statute, for example, appears to say (to this layperson) that anything inside a trust or an insurance contract, IRA, etc. is all protected from judgments (excepting a few things and always excepting alimony / child support).  Anyway, if I'm reading it right, someone in New York should have some trusts if they have significant assets.

 

http://www.irafinancialgroup.com/solo401kassetprotection.php

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How about this to ease your concern:

 

1)  Quit Job

2)  Open Fidelity "self-employed 401k" -- perhaps you become a self-employed handy man for a few months between jobs

3)  Roll your employee 401k assets (and perhaps other IRA accounts as well) to the new self-employed 401k.

4)  start new job at new employer

 

There, now you have it all in a 401k, not in an IRA

 

Ah... there's a catch for solo-401k plans:

 

If your savings are in a 401(k) account, they are protected from all forms of creditor judgments, including bankruptcy, says Kyle Brown, a retirement counsel with Watson Wyatt Worldwide in Arlington, Va. Solo 401(k)s, however, don't necessarily have the same protections as other 401(k) plans; in some states, solo 401(k)s are protected from creditors, but in others they aren't.

 

http://online.wsj.com/news/articles/SB124181801239401917

 

 

Some states give good protection to IRAs (others don't):

 

Other states, such as Texas, Arizona and Washington, protect virtually everything inside an IRA from creditors. In Arizona, for example, only contributions made within the last 120 days can be subject to creditors' claims in a bankruptcy.

 

http://www.latimes.com/la-ira-story3,0,6977190.story#axzz2j51AkHYR

 

Thanks! This is something I need to look into in more detail.

 

#1 is complete. I did already leave my job earlier in the month. Just following the path you trail blazed :)

 

Vinod

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One other thing. 

 

Australia only respects "employer sponsored" plans.  So if you were planning to quit your job, roll the money to an IRA, and then move to Australia... be careful.  They treat an "employee sponsored" plan the same as an Australian Superannuation Fund (their version 401k), but they consider IRA accounts to be a "Foreign Investment Fund".

 

Other countries may do the same.

 

So if you plan on remaining in the US, you don't need to care about that.  But if you think you might leave the US later on, put some thought into it first.

 

 

Also, it appears you can't roll a Roth IRA back to a 401k, but you can do it with a Regular IRA. See, I've trapped myself.  I can't get my RothIRA assets back into a 401k -- so I can't go to Australia.

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  • 2 months later...
  • 2 months later...

Does your plan allow after-tax contributions? Can you roll-over that contribution in-service (to a Roth IRA)?

 

Normally am I allowed to rollover to a Roth IRA only when I leave the company?

 

Sorry, only just saw this.

 

Ask your administrator, muscleman. Some plans allow in-service roll-overs.

 

Mine, for example, allows me to roll-over my after-tax contributions every six months directly to my Roth IRA. Instead of adding $57,500 to my 401k and only $6,500 to my Roth IRA annually, I add $36k and $28k respectively. Gives me a little more flexibility.

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Does your plan allow after-tax contributions? Can you roll-over that contribution in-service (to a Roth IRA)?

 

Normally am I allowed to rollover to a Roth IRA only when I leave the company?

 

Sorry, only just saw this.

 

Ask your administrator, muscleman. Some plans allow in-service roll-overs.

 

Mine, for example, allows me to roll-over my after-tax contributions every six months directly to my Roth IRA. Instead of adding $57,500 to my 401k and only $6,500 to my Roth IRA annually, I add $36k and $28k respectively. Gives me a little more flexibility.

 

How are you able to add 57k to your 401k? Isn't the limit 17.5?

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If under 50 years of age, $17.5k the pre-tax contribution limit and $52k the total contribution limit (including employer and after-tax contributions).

 

After 50, can make an additional $5.5k pre-tax "catch-up" contribution (raising the total contribution limit to $57.5k).

 

Having just turned 50, I contribute $23k pre-tax, my employer contributes $13k, and I contribute $21.5k after-tax (rolling over the last to my Roth IRA).

 

Unfortunately, not all employers allow after-tax contributions and fewer allow in-service roll-over.

 

 

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