A 401(k) rollover may allow exposure to a lower-cost, more comprehensive set of funds than available in your employer's plan. Often, the set of investment options in 401(k)s is fairly limited and may be relatively higher cost.
Step 1 - Evaluate Your 401(k) Options
Look at the options in the 401(k). Can you invest in emerging market stocks? Do you have access to real estate investment trusts (REITs)? How about Treasury Inflation Protected Securities (TIPS)?
At FutureAdvisor, we believe these asset classes are critical to a portfolio with robust risk/return characteristics. Now, if your 401(k) isn't your only investment vehicle, you may be able to hold these assets elsewhere, such as in an IRA, but if you don't have other investments, you should consider rolling over your 401(k).
Step 2 - Evaluate Your 401(k) Costs
Fund costs have been falling year-on-year over the past decade, and often 401(k)s don't offer the cheapest funds. For example Vanguard offers an S&P 500 tracker for 0.05% a year, and most asset classes cost between 0.05% and 0.40%. If your 401(k) options cost more than this, then rolling over to access lower cost investments may make sense.
Step 3 - Evaluate The Size Of 401(k) Investment
How large is your 401(k) relative to your other assets? If it's small in comparison, a rollover may not be worthwhile. If your 401(k) is a sizeable part of your portfolio and you see lower costs investment options elsewhere, a rollover may make sense.
Step 4 - Implement the Rollover
Most leading brokerages make a rollover relatively easy. Look for a low cost provider because differences in services are immaterial, and lowering cost will have an impact on your returns. If you're wondering what a balanced portfolio might look like, take a look at FutureAdvisor's recommendations to find a set of low cost and well diversified funds appropriate for your age and risk tolerance.