The Post-Employment 401(k) Conundrum

Thousands of Americans will receive a lump of coal for the holidays: a layoff notice from an employer trying to polish the books by year-end.

Among the many choices facing those who lose a job, move to a new firm or retire: keep the old 401(k), shift to a new employer’s, cash out or roll into an IRA? There are a couple of subtle ways to determine which option is best for you.

First, does the old plan give you access to “institutional class” mutual funds that carry especially low fees? For individual accounts, these shares are generally reserved for investors with large balances, often $100,000 or more. Shifting your money from the 401(k) to an IRA might be less appealing if investing in the same fund would require downgrading to “investor” shares with a higher expense ratio.

The Vanguard 500 Fund investor-class shares (Stock Quote: VFINX) charge 0.16%, for instance, while the “admiral” class of the same fund charges half as much. The admiral shares (Stock Quote: VFIAX) have a $100,000 minimum account balance for individuals.

Don’t just assume the 401(k) offers a cheaper class. Some 401(k)s offer only the more expensive investor shares, even for people who have enough in the account to meet the minimums for cheaper ones. Those investors would do well to roll over to an IRA to get the less-expensive shares, assuming they want to stay in the same funds.

The second issue: could you reduce expenses by moving from a mutual fund in a 401(k) to an exchange-traded fund in an IRA? ETFs are not common in 401(k)s, but they can be preferable because of lower expenses.