Many, perhaps most, of us leave an institution or two behind in the course of a career in higher education. We hope the grove will be greener on the other side of academe, that there will be better students, more lab space, brighter colleagues, more vaunted status in the profession, higher salaries, or reduced contact hours. Hope springs eternal.
If and when you do leave behind an employer, it is an important financial moment. A question inevitably arises: What should I do with the retirement assets accrued at the institution I am leaving? A rollover—moving your money from one financial provider to another—at such junctures may be worth considering.
Before we talk rollover, though, let's talk "Roll over, Beethoven." Pennywise is not a Millennial. I am not even a Gen Xer, if any still exist (that always struck me as an empty designation for a nongeneration). Pennywise is just old enough to be somewhere on the hindmost edge of the Baby Boom. I am among the last of American boys who thought it an obligation to discover the history of rock'n'roll by thumbing the stacks in used-record stores, tracking down legends in cardboard sleeves.
At first I understood none of the sexual allusions in that Chuck Berry song—reeling and rocking, temperatures rising, jukeboxes blowing a fuse—but, then, few Americans do. That explains why Berry is entombed on Golden Oldies stations with the Monkees and other soulless dreck, not with the jump blues, where he belongs. (Who, now, even recalls the jump blues?)
Now it's early in the mornin' and I'm a-givin' you a warnin' about rolling over your retirement assets because I ain't got nothin' to lose.
Here is the warning: Don't cash out. I offer myself as a cautionary tale. The first time Pennywise left an employer, I blew it, big time. I cashed out my benefits. That was after I taught at Northwest Rainforest University for a year and a half. I had a wife and newborn to support. The money would come in handy, indeed. So I withdrew every last penny from my little retirement account.
So never do that. A cash withdrawal means all of that money you set aside in tax-advantaged accounts is subject to taxes immediately. Furthermore, if you are under 59, you get hit with an extra 10 percent penalty fee for premature withdrawal. To top it off, you're more likely to squander the money than reserve it for retirement, so you damage your long-run economic security. I have since made up for my foolishness, but I would have been a whole lot smarter to have left that money alone.
There are two sensible options when leaving an employer. The first is summed up in the phrase, "Let It Be" (words of wisdom from songwriters who knew Chuck Berry's greatness). Leave the account alone. It will be fine. It will grow. Draw it down many years from now, in retirement.
The second option is the rollover, which occurs when you take the opportunity presented by your separation from an employer to transfer accrued assets from one financial-services provider to another. That can make sense for certain definite reasons. It might be that you don't want a lot of accounts floating around from different former employers, so rolling them into one, consolidating them, simplifies housekeeping. Another reason might be that your old provider does not seem as advantageous as the new one.
Pennywise recently rolled over his retirement assets. I had saved assiduously in both a regular and a supplemental TIAA-CREF account through my employer. In general I was and am pleased with TIAA-CREF. However, when I switched employers recently, I decided to roll over all of my TIAA-CREF money to Vanguard, a big mutual-fund company.
There were two reasons for my decision. One was convenience. My wife and I already had Individual Retirement Accounts (IRA's), college-savings accounts for our children, and some additional holdings at Vanguard. Upon reflection I decided I wanted all my money in one place, on one statement. I could have done that by exchanging all the Vanguard funds for their equivalents at TIAA-CREF, which also offers IRA's and the like. But the balance tipped to Vanguard because of the second reason, which I found hard to ignore: costs.
The way to gauge the cost of your investment vehicles is to examine their expense ratios. Expense ratios are the percentage of your assets that a fund company charges you to manage your money. Those management fees pay for advertising, postage, printing, Web sites, customer-service reps, executive salaries, and office buildings—not to mention profits. Many investors don't notice expense ratios; the fees are deducted from your returns without your ever realizing it. But it behooves you to pay attention. A lot of money is at stake.
The investment industry as a whole typically charges something like 1.5 percent a year, on average, in expense ratios for mutual funds. By that standard, TIAA-CREF's expense ratios are eminently reasonable: about half or a third the normal range. About five years ago, however, during the stint of Herbert M. Allison Jr., a Merrill Lynch veteran, at its helm, TIAA-CREF raised its expense ratios beyond what they had long been. As a result its products are no longer bargains when compared with lower-cost companies.
For example, the CREF Bond Market Account offered in typical university retirement plans has an expense ratio of 0.46 percent, much better than the industry norm. But the Vanguard Total Bond Market Index Fund—nearly identical—has an expense ratio of 0.22 percent, better than twice as cheap. Likewise, the CREF Equity Index Account has an expense ratio of 0.42 percent, whereas Vanguard's comparable Total Stock Market Index Fund has an expense ratio of 0.18 percent. Vanguard Admiral Shares offer even greater discounts to super-savers, reducing expense ratios to the incredibly low point of 0.09 percent in the Total Stock Market Index Fund and 0.14 percent in the Total Bond Market Fund.
What difference does that make? Assume a $100,000 investment with a 5-percent annual rate of return. The difference between an expense ratio of 0.42 percent and 0.09 percent would be as follows: $5,009 over 10 years, $15,927 over 20 years, and a stunning $37,988 over 30 years. Shaving off expense ratios in this manner can save you a small fortune—especially if you wind up with hundreds of thousands of dollars saved by the end of your career, as is commonplace among professionals.
My hope is that, in time, TIAA-CREF will reduce its expense ratios to stay competitive with Fidelity, Schwab, Vanguard, and other low-cost providers. But for now, I found switching to Vanguard decidedly in my financial interest.
In next month's column, I'll explain the nuts and bolts of how to go about a rollover to another company, if that's what you decide to do. In the meantime, remember that the chief point is to save, save, save. Both TIAA-CREF and Vanguard are sound places to do so when compared with the extremely overpriced funds held by so many Americans.
Why save, save, save? Because, as Chuck Berry taught us, as long as you got a dime, the music won't never stop.