Need to Rollover a 401k? Consider This.

If you’ve recently lost your job and have money in a 401k, there’s a good chance you may want to roll that money over to a new broker with more options. These days robo-advisors are a popular choice to automate investing and that can make saving for retirement easier. You just set it and forget it.

There’s a good selection of brokers in the “Robo-Advisor” market these days and most are a good choice for a rollover.  Wealthfront and Betterment were among the first.   Vanguard has an offering.  Fidelity and Schwab do as well.    I’ve even read recently that E*Trade has jumped on the bandwagon.   I have experience with Wealthfront and Betterment and I don’t really have any complaints.

mutual funds are forced to periodically realize capital gains which creates a taxable event in a non-retirement account

It’s About Cutting Fees

The reason for the growth of this style of investing is clear.   It automates something in a cost-efficient way.     Vanguard has become very popular in recent years for their low-cost expense ratio ETF’s and mutual funds.   And you can invest in a mutual fund that is managed and forget about it.   But one issue is that from time to time, mutual funds are forced to periodically realize capital gains which create a taxable event in a non-retirement account.    Your fund will typically distribute a capital gain only to then turn around and reinvest it.   And you pay taxes on that capital gain.

One way to avoid the forced capital gain is to use ETF’s.  The only issue is that if you invest in ETF’s like the famous “3 fund portfolio”, you kinda need to manage it.   A typical setup might be 33% Bond, 33% Total Stock Index and 34% International.

Three Fund Portfolio
Vanguard Three Fund portfolio courtesy of

For your initial setup, this isn’t terribly difficult, but EVERY TIME YOU PUT MORE MONEY IN (or withdrawal) you need to allocate the shares and asset allocation properly.    If you’re doing a weekly deposit, this is going to require a bit of calculation every week to calculate it down to the share.  And you can’t do fractional shares without a robo-advisor.

Bring in the ROBO-ADVISORS.

You simply make your deposit and the algorithm buys in accordance with your desired portfolio allocation.   If the bond market is down you’ll be buying and getting the cheaper shares.  If stocks are a bit high, you’ll be buying a bit less in order to bring your portfolio into balance.

This is what Robo-Advisors do and this is a fine application of technology and the algorithm.   But there’s just one little thing.  They do it for a small fee.

Bring in M1 Finance

Now, you could certainly make the debate that the fee other brokers charge is reasonable and worth it.   Intelligently maintaining the portfolio balance could give you an edge of .25% vs blind buying at a fixed allocation.   And you could also make the argument that the time saved is worth something.    But there’s an army of Vanguard soldiers that simply aren’t hearing it.  And with good reason.   Even a fraction of a percentage compounding over time adds up.  This is where M1 Finance wins.   It’s simply FREE.

If you remove the cost of the Robo-Advisor, it’s kind of hard to make an argument AGAINST using one at least for taxable accounts.    Now to be fair, I think for a retirement account you’re probably fine with just using a typical retirement target fund.  They realize capital gains but it’s not a taxable event so it doesn’t matter in a retirement account.   But for taxable accounts with free management… why not?

Initial impressions

I signed up for an account to check out M1 Finance.  I’ve got to say I like what I see so far.  The interface is slick and fast. Beyond that, you’ve got a lot of options to do more than just buying a set portfolio and can even create baskets of individual stocks you can buy commission-free. Overall I think this is a very good thing for the investment world and should force other brokers to lower or eliminate management costs for simply using a buying algorithm.

Interested in trying M1Finance? If you click any of the M1 Finance affiliate links on this page, you’ll get $10 for signing up. Click below to set up an account.

M1 Finance

Disclosure:  I have an affiliate partnership with M1 Finance and may earn a commission on new signups over a certain threshold. You’ll also get a $10 credit for signing up.

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