Where To Put Rollover 401K

Reader Question

I recently read your excellent reviews on betterment.com v. vanguard lifestrategy. I'm still left scratching my head as to where to put my rollover 401k for retirement. I'm a 39 year old software developer, I'm with a new employer that doesn't have a 401k program, so I want to make my current savings work harder. I like the interface with betterment, but being a software guy, I don't mind using clunky tools from vanguard. But ultimately, I need a place to consolidate 4 separate 401k accounts. Thanks! Seth

My Reply

By far the simplest choice for a rollover IRA is one of Vanguard LifeStrategy funds. It also happens to be one of the smartest choices. One of the very few (only?) drawbacks to LifeStrategy funds is that they lump bond and stock investments into a single portfolio which may be less than optimal for taxable accounts (bonds should generally go in tax-sheltered accounts, though today's interest rates are bringing that rule of thumb into doubt). Since you are talking about rolling over into an IRA, the considerations of tax efficiency do not apply. So I would not hesitate a second to go with LifeStrategy. You can save several more hundredth of a percent annually by directly investing into Vanguard mutual funds that make up LifeStrategy funds, but at that point it's probably not worth the hassle. LifeStrategy provides free auto-rebalancing which alone is worth those tiny fractions of a percent.

Betterment is not a bad choice. In fact it's probably better than 90% of alternatives, but that's just because most alternatives are terrible. It's just that Vanguard Lifestrategy provides all the same benefits (with one possible exception of tilting, described below) and does so at 0.2%-0.4% cheaper annually. That may not sound like a lot but will add up to huge savings when compounded over your investing lifetime. So Vanguard is a pretty easy choice for me.

Where you should take some time is deciding exactly which one of the LifeStrategy funds is the appropriate choice for you. They range from very conservative that's pretty much guaranteed to have steady and very pedestrian returns to fairly aggressive which can end up anywhere from terrible to terrific depending on how the unknowable future unfolds. Only you can make the decision as to which one is right for you.

The considerations that go into making the decision include your personal financial needs, goals, and, importantly, your investment temperament and discipline. It is a very bad idea to pile into an aggressive investment when you are prone to panicking and selling out when the stock market plunges (which it will -- such is the nature of the beast). I have several articles about making this decision, including http://www.longtermreturns.com/2012/03/selecting-investment-strategy.html .


A much more minor consideration is whether you want to introduce a so-called "value" and/or "small" tilts to your portfolio. In everyday language, "small" tilt is investing relatively more in smaller companies while "value" tilt is investing relatively more in the companies that tend to have cheaper valuations and higher dividend yields. Many Ph.Ds were made quantifying benefits from such strategies, so I won't try to make a definitive conclusion here. Suffice it to say that they are both reasonable strategies and neither is likely to make a huge difference. I am personally much more sympathetic to value tilting than small tilting, but don't see either one as a necessity or surefire winner.


LifeStrategy funds (and Vanguard in general) do not tilt. Betterment portfolios tilt quite heavily to both value and small. Whichever way you decide to go, just as with all other investing, it is extremely important that you make an informed decision and stick with it, through thick and thin. The worst thing you can do is decide to tilt and then back out of it when tilting starts to lag the overall market. Or vice versa. Make a decision and stick with it.

As I said, Betterment always tilts, so if you go with them the decision is made for you. Vanguard LifeStrategy does not tilt, but you could easily add your own tilt by investing some of your rollover IRA portfolio into other Vanguard mutual funds devoted to value or small companies -- VIVAX (value), NAESX (small), VISVX (small value). As I also said, this is a minor consideration. It is perfectly fine not to tilt at all -- it would make things simpler.

For a completely average investor, I would say that Vanguard LifeStrategy Moderate Growth Fund (VSMGX) which provides 60% stocks + 40% bonds diversified portfolio at 0.16% annual expense ratio is just about the best choice.