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Rollover that 401k

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My first job after Babson College was with Fidelity Investments. I worked at Fidelity Institutional Retirement Services Company (FIRSCO). It managed the 401(k)s of large companies. On big up or down days in the stock market, phone volume would pick up exponentially. Everyone had to help answer calls—including the CEO, to his dismay.

Participants in the company plans would call up and ask about the market. Ironically, I wasn’t able to offer any advice to clients, and that’s what I do all day now. Back then, participants wanted to know what they should buy or sell. All I could do was read descriptions, as if I were reading a menu at a restaurant to them. I couldn’t say how wonderfully the fresh sole meunière would pair with a Côte d’Or Montrachet. I could say how Fidelity Magellan did over the past three years, but I couldn’t give my thoughts about the future.

The reason for this stifling regulation is the Employee Retirement Income Security Act (ERISA). Section 404c requires that a 401(k) sponsor, like Fidelity, provide adequate information about the plan’s investment choices. But anything beyond describing the investment options in the plan borders on giving advice, which is prohibited. A compliance officer would spend a good part of a morning speaking to a room full of us about ERISA, among other items.

There was also a drought of investment choices. The scarcity of choices in some made the standard McDonald’s menu options—a burger, chicken, or fish—seem generous. By offering too many choices, a plan risked confusing its investors.

A lack of choices is one reason the largest bond fund holding in 401(k)s is the PIMCO Total Return Fund. It’s run by uber bond guy Bill Gross. Unfortunately for Gross, it has underperformed this year. Investors are up only 1.1%. His Treasury bond and interest rate bets haven’t worked out so far this year. My point is not to count Gross out. It’s that investors have been heading for the exits in droves. Some probably could use some advice right about now as to what to buy, while others may be stuck with few options to choose from because that fund is the only game in town.

The best way to increase your options with a 401(k) is to roll it over to a rollover IRA as soon as you’re eligible. Or I would suggest going the self-direct route, where you can work with someone you trust to help. At the end of the day, the last thing you want to do is make investment decisions.

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.