Pension rollovers

[+ quoththeraven]

Wasn't sure if I could add anything at this late date, but it looks like I can, so here goes ...

 

In a former life, I was an employee benefits lawyer who helped employers write and administer qualified retirement plans and dealt with fiduciary issues arising from them, including investment management. CALPers is a government plan established by statute, not a qualified retirement plan. (It's a technical distinction, but a real one; a governmental plan isn't subject to strictures of tax law or the Employee Retirement Income Security Act of 1974, as amended, which governs non-governmental, non-church plans.) You can't roll anything over to it, and I'm not sure that you can roll it over to an IRA, as CALPers may be a defined benefit plan that only pays monthly benefits.

 

That out of the way, as you and everyone else has recognized, since there's no qualified retirement plan for you to use, your best (i.e., tax-free and practical) choice for your retirement plan money is an IRA rollover. Most likely your former employer will do this via a direct rollover unless you ask otherwise; however, it is possible (and from an employer view preferable) for the direct rollover, while made payable to the institution where you've established your IRA, to be mailed to you for you to deposit. No tax consequences because the check isn't payable to you, but you're responsible for making sure it's deposited.

 

What some have hinted at, but not expressly articulated, is that as a small investor (I'm assuming you don't have millions to invest), you are better off investing your IRA in mutual funds rather than individual stocks. I will also tell you (and keep in mind, while I looked at fiduciary issues, helped oversee and learned from an investment advisor to a couple of multiemployer funds, and know something about modern portfolio theory, I was never an investment advisor, manager, registered representative, or other form of investment professional) that the BIG issue with mutual funds and IRA accounts is expense ratios. All other things being equal, the lower the expense ratio, the higher the rate of return. The more actively managed the fund, the higher the expense ratio, and (all other things being equal) the lower the rate of return.

 

The moral of the story? USE INDEXED FUNDS. There's research out there that suggests that in the long run, you will do better with them. (Or, to put it another way, most actively managed mutual funds don't outdo the market, or at the very least have more downside risk.) Indexed funds capture the market. You won't outdo the market, but you won't be subject to the downside vicissitudes of most actively managed funds. There may be actively managed funds that do better than indexed funds, but they're likely to be funds only institutions or high net worth individuals (i.e., those with a lot of money to play around with) can access. And indexed funds, being funds that basically can be picked and managed by a computer, have much, much lower expense ratios -- .05% (at the highest) vs. 1 or 2%. Over time, compounded, that makes a big difference. In fact, expense ratios are one of the most important things to look at when you (or your advisor) looks at a prospectus. ALWAYS LOOK AT RATES OF RETURN NET OF EXPENSES.

 

Piece of advice #2: While you may want to retain an outside investment advisor (and whoever told you to use someone not beholden to the place where you decide to invest is right), the basics of investing are pretty simple. You can reduce a lot of risk simply by investing in enough different asset classes (diversification). The idea is to invest in assets that move in different directions. For example, when stocks (equities) are down, bonds (debt) tend to be up, and vice versa. Ditto for various levels of risks within those assets classes; when growth stocks are up, income stocks (those with high dividends) may be down, and vice versa; same for conservative vs. junk bonds. The US market and various foreign markets (developed economies vs. developing economies) often move in different directions. The technical name for all this is negative coefficients; you want the sum of the coefficients associated with each asset class in which you invest to be as close to zero as possible.

 

Piece of advice #3: Unless you expect to need to take a distribution of the bulk of your account soon, or you're in bad health, keep the majority of your investments in equities for now. How much that is depends on your risk tolerance, but over time, equities outperform other asset classes. That said, unless you have a much bigger rollover than I think you do, invest little or nothing in funds invested in assets like real estate, gold, or the like.

 

I have professional experience with TIAA-CREF and Fidelity and personal experience and investments with TIAA-CREF and Vanguard. No disrespect to Fidelity, but I'd recommend TIAA-CREF and Vanguard, both of which are consciously low-cost (Vanguard makes a bigger deal of it than TIAA-CREF). Fidelity puts together good plan documents and informational materials for 401(k) plans, but I didn't get the sense that when it came right down to it, they were as gung ho about or as interested in putting participants' interests first as the other two companies.

 

TIAA-CREF may be better at and provide more personal service when it comes to investment help, but Vanguard has a wider array of funds. TIAA-CREF customer service is pleasant and knowledgeable; Vanguard's, which I haven't dealt with in a few years, is probably a little more brusque but still efficient and knowledgeable.

 

Hope that helps!

[+ quoththeraven]

Sorry -- one last thing: If, as I seem to remember, this is a rollover from a 401(k) (i.e., pre-tax money), forget a Roth IRA. Money goes into a Roth on an after-tax basis, which means you'd have to take a tax hit on the rollover. I'm not sure that's even possible and still make it a rollover instead of a contribution (and the annual limits on contributions are likely to prevent you from contributing the entire account), but there's no good reason to take the tax hit now.