A Simple Rebalancing Strategy For Investors With Multiple Retirement Accounts

November, 3 2015 | Prashant Mehta

The average person changes jobs 11 times over their career. So says research conducted by the Bureau of Labor Statistics. Along the way, they enroll in retirement benefit plans offered by their employers. Then, in many cases, when they change jobs they simply leave their accumulated nest egg with their previous employer’s retirement program.

Is this a good idea?

In many cases, it is not a good idea. When they change jobs, employees can rollover and consolidate their retirement accounts into a single retirement account like an IRA. There are a number of benefits to this.

First is more investment choices. Each employer’s plan has a particular set of funds it offers to employees. The underlying investments in these funds vary greatly by issuer and a particular issuer may not be available in every employer’s plan. Having multiple issuers and varying investment portfolios makes it very difficult for an advisor or client to know their true exposure to risk across many accounts. In addition, these funds can hold similar types of investments creating an over (or under) concentration of risk. This is undesirable and can affect the overall performance of the portfolio..

Second is the possibility of lower administration fees and fund expense ratios. Each employer’s plan usually has a custodian, an administrator and a consultant, all of whom charge fees to help the employer manage the benefits. These fees are generally passed along to the employees and can add up significantly over time. Employees should check the fees that your company 401(k) is charging, specifically any administrative fees and your fund’s expense ratios. If you are paying more than 1% total, you might want to consider a lower cost IRA as an alternative.

Recently, the Invessence team has been working with a Certified Financial Planner (CFP) to help him allocate and rebalance a client’s portfolio. We analyzed a husband and wife family portfolio with close to $1.5 million in assets spread over several taxable and non-taxable accounts with multiple custodians. Several of the accounts held similar types of investments creating an over-concentration of a single asset class. Due to the high correlation among funds, more than half of the funds were redundant and not necessary. In this case, having multiple accounts created a significant challenge on the advisor’s ability to rebalance accounts across custodians and manage the investor’s exposure to undesirable risk.

Invessence helps advisors classify their client’s portfolios into core asset classes across multiple accounts and custodians.  The advisor can look at each client’s account individually or grouped together as a family to get a better picture of their underlying investments and true risk. Traditionally, advisors have spent hours manually building spreadsheets to replicate this service.

Invessence a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.